Just about the time I had posted the last blog, I read about a prominent World Bank official speak about Dubai and the future. Indeed I endorse the views of the learned World Bank official, especially on a number of issues. Most importantly the feeling that the debts that are maturing in the year ahead will be met and it would add that it is unlikely that the fiasco that was caused by abrupt announcements will happen again; all the more because lenders and the borrowers are in discussions.
However, some underlying anomalies within the economic system need to be corrected, and while this may take time, the building blocks needs to be put in place surely soon. One of these basic steps is to consider these measures, obviously in more detail than a blog can narrate, and then take a concerted view on the matters. I do feel that the economy has, since 2001 become highly skewed in two directions:
a. The private sector contribution to the GDP being an abysmal 13% imply that either government or government related entities were fueling the pace of the GDP growth. The result was that sectors like Hospitality (Jumeriah Group), and Real Estate (Nakheel, Emmar, Dubai Properties and others) were the dominant players and hence in a sense creating a huge concentration of rapid growth in the semi public sector or public sector hands. While as an impetus to start things off this is not a bad idea at all, but at some stage the diversification of this process into private hands through IPO's should have been considered.
b. The development cycle was being fueled by a high debt level, as most of the real estate developments involved infrastructure build out and the pace of planning outstripped the resources needed, resulting in a scramble for debt to fuel the engine. This was at no time seen in a broader perspective perhaps even considering inviting the private sector into a utility model to build the infrastructure, as is done in a number of countries.
This propensity of concentration in the sectors mentioned and the leveraging of the debt has to go through a process of de-leveraging and privatization. Ofcourse both these avenues pose some unique problems.
De-leveraging can only work with liquidity and appetite available for restructuring the loan profiles of the current debt, and this seems to be under way. However, privatization in the current market has to be put on the back burner. I personally think that this is somethign that should be given thought to.
Here is what I would do.
Announce soon after the debt resconstruction that the privatization is an option and to float mezzenine funds to take equity positions in some of the assets with a clear idea that within say 24 months the privatization will occur. This wll give the market the confidence that is needed, redress the private sector contribution to the GDP and most importantly decouple the existing situation. Yes it sounds simple, but it is actually something that needs planning and can be done selectively. eventually the government or GRE's can own about 30-40% of the entties and sell off the rest. I suspect the cash flow from these would be ample to redress the existing situation.
I believe some assets are perfect for this strategy, i.e. the hospitality sector, while others may have to be repaired and their timing of privatization may well be in the end of 2 years from now. But the intent itself, if made public, brings about the interest in the private sector, demonstrates a will to take structural measures to fix things and most of all shows the world the way out of the situation.
Showing posts with label financial crisis. Show all posts
Showing posts with label financial crisis. Show all posts
Monday, December 28, 2009
Wednesday, December 16, 2009
UAE Bashing- time to stop it.
Since the last week of November 2009, and after Dubai's surprise, but badly handled announcement about Dubai World, it almost became a fashion to indulge in some Dubai Bashing. So much so that the rating agencies, for whom I have scant respect, jumped in and turned the Dubai bashing sentiment into an all out assault on the UAE. Pundits who just a year ago were queuing up for invites to the latest launch of a real estate project were suddenly become experts on who felt they have to join in the assault. I am not suggesting a conspiracy theory in the media, but simply pointing out that it seems its fashionable to run down UAE and Dubai because that is what sells newspapers. I fully admit that there are problems and yes there is a need for transparency and accountability of the situation and a great deal needs to be done to bring back confidence to the system.
However, it is deeply irritating that when the good news has come out, the bond that was the subject of such concern has been paid, and most importantly Abu Dhabi and Dubai have shown that there is a supremacy of the Federal system, resulting in the $10 billion assistance from Abu Dhabi to Dubai, all this good news is not being presented in the right light. A senior correspondent of a class A European newspaper asked me, in a rather sinister way, as to what was the price Dubai will pay for this assistance. Even though whether the assistance is a loan, or indeed an asset purchase, frankly who cares? The bottom line is a crisis has been averted, and some measure of confidence has come back to the market place.
Rating agencies have found more reasons than one to continue to make it sound like a contagion. I wonder what did they know that was new now compared to a year ago? Did they not know of the debts of Dubai World? Had they not in their review process and due dilegence with banks, when granting the ratings, discussed these issues? So they say the standstill suddenly brought home the vulnerability of the situation; it highlights how weak their research was in the first place.
It is time to look ahead now. I know that the financial system has been tested in this crisis, and more importantly the country's political will as one nation has been tested and this came through with flying colors. I have been resident here for close to 30 years, and have often spoken out about matters that have needed improvement. I have not been candid and blunt because `I am not some journalist who might want sensationalism to promote my name, but someone who really believes that in the past 38 years UAE has grown to be a fabulous place to live and work. Its a safe place, with a great infrastructure and people who have been more welcoming then others. Yes there are tons of issues that need to be resolved and this is where the focus must shift.
I was asked what was the lesson learned from this crisis.
I would say if there is one thing that is not need is a system of governance, at the Federal level, whereby debts of each of the emirates and their GRI's can be monitored. I was taken aback that Dubai World, on its own was allowed to pile on such a colossal debt, much larger than Dubai's own debt. I believe that this situation should never be allowed to happen again. I am not concerned with the politics of the situation, it is in a sense, a risk even a rich nation like UAE cannot afford to take. Indeed this crisis will pass, and I say this with knowledge and confidence that there will be support from all quarters within the country to resolve the problems of Dubai World, and there will be a clear process to ensure it never happens again.
Lenders must also be made to realize that they have to carry part of the pain in this. I asked a well known journalist who has been writing about this matter every day as to why hasn't the carelessness of the bankers been questioned in this lending? I never saw one hard hitting piece on this subject, it was almost as if only the borrower was being blamed for the excesses. I believe that while the new arrangements for Dubai World have, in the longer term created the means for the repayment of the debts to take place, there is a need for bankers and bond holders to also agree to a restructured debt. This is the pain of lending and it is time that all parties understand this comes with the territory.
However, it is deeply irritating that when the good news has come out, the bond that was the subject of such concern has been paid, and most importantly Abu Dhabi and Dubai have shown that there is a supremacy of the Federal system, resulting in the $10 billion assistance from Abu Dhabi to Dubai, all this good news is not being presented in the right light. A senior correspondent of a class A European newspaper asked me, in a rather sinister way, as to what was the price Dubai will pay for this assistance. Even though whether the assistance is a loan, or indeed an asset purchase, frankly who cares? The bottom line is a crisis has been averted, and some measure of confidence has come back to the market place.
Rating agencies have found more reasons than one to continue to make it sound like a contagion. I wonder what did they know that was new now compared to a year ago? Did they not know of the debts of Dubai World? Had they not in their review process and due dilegence with banks, when granting the ratings, discussed these issues? So they say the standstill suddenly brought home the vulnerability of the situation; it highlights how weak their research was in the first place.
It is time to look ahead now. I know that the financial system has been tested in this crisis, and more importantly the country's political will as one nation has been tested and this came through with flying colors. I have been resident here for close to 30 years, and have often spoken out about matters that have needed improvement. I have not been candid and blunt because `I am not some journalist who might want sensationalism to promote my name, but someone who really believes that in the past 38 years UAE has grown to be a fabulous place to live and work. Its a safe place, with a great infrastructure and people who have been more welcoming then others. Yes there are tons of issues that need to be resolved and this is where the focus must shift.
I was asked what was the lesson learned from this crisis.
I would say if there is one thing that is not need is a system of governance, at the Federal level, whereby debts of each of the emirates and their GRI's can be monitored. I was taken aback that Dubai World, on its own was allowed to pile on such a colossal debt, much larger than Dubai's own debt. I believe that this situation should never be allowed to happen again. I am not concerned with the politics of the situation, it is in a sense, a risk even a rich nation like UAE cannot afford to take. Indeed this crisis will pass, and I say this with knowledge and confidence that there will be support from all quarters within the country to resolve the problems of Dubai World, and there will be a clear process to ensure it never happens again.
Lenders must also be made to realize that they have to carry part of the pain in this. I asked a well known journalist who has been writing about this matter every day as to why hasn't the carelessness of the bankers been questioned in this lending? I never saw one hard hitting piece on this subject, it was almost as if only the borrower was being blamed for the excesses. I believe that while the new arrangements for Dubai World have, in the longer term created the means for the repayment of the debts to take place, there is a need for bankers and bond holders to also agree to a restructured debt. This is the pain of lending and it is time that all parties understand this comes with the territory.
Sunday, December 13, 2009
The Wolves need to back off.
When the crisis of credibility and debt was unfolding in Dubai and the region, I had commented that this crisis has one benefit that it will make the UAE think like a nation and not as individual city states. Irrespective of the rumors of assets deals between Dubai and Abu Dhabi, the bottom line was, in my eyes, that an adherence to a one Nation concept was all the more important to all parties. Since September of this year this has been the message of one people and one nation. It was in this light that the announcement today of Abu Dhabi's $10 billion support for Dubai has been made. Yes it leaves one wondering why all this drama if the end the Sukuk maturing today was going to be paid in the first place. I have all along said the public relations side of this episode leaves a great to be desired and I am sure all parties have learned from it.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
Wednesday, December 9, 2009
Moody's Cheap Shot.
During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Saturday, December 5, 2009
Can Dubai survive the Debt crunch?
Dubai's dream of progress and prosperity may well have been dented but its not a failed dream. In the context of the world economic crisis the crisis that Dubai faces is not as monumental as is being suggested. Dubai Worlds obligations are listed at $60 billion but these are obligations to contractors, suppliers, and indeed bond holders and debt providers. A number of contractors and consultants have only recently indicated that they would be willing to take a haircut on their receivables, some suggesting as high as a 35% reduction in exchange for a payment plan. After all, the logic goes, that these contractors benefited with robust profits from the same clients in the good days and indeed are more accommodating as the times get rough.
Over the weekend Bond holders of the $4 billion Sukuk were adamant that given they have 25% of the Sukuk holders on their side they can negotiate tough to force a payment of the bonds. Failure to have this 25% might well mean that Sukuk will be restructured, and even if an enforcement is done there are complex legal issues concerning Sukuk's which, frankly, have not been tested in a court of law before. Interestingly, if Dubai government, as the shareholder of Dubai World, did want to pay this Sukuk off, then even it runs the risk of being accused of causing losses to Sukuk holders who sold the bonds after the initial announcement of the standstill, since the standstill announcement came from Dubai government and not Dubai World itself.
Paying this Sukuk is possible and if the restructuring or extension to May 2010 is agreed by more than 75% of the holders then the current issues will subside to some extent. If not then I do feel that the resources to pay this $4 billion bond will happen even though may leave many of us wondering why the whole drama happened in the first place. I suspect that when the Dubai Government announced the 'standstill' it was felt that the market would take this news positively as the government was stepping in. This clearly backfired and the market took the news they didn't like most and made a meal of it all. If I was a bond holder and a principal shareholder being the government was initiating a new plan for repayment I would rather go with it then to rely on the assets of this particular Sukuk (in this case Nakheel's land bank which is highly deflated at the moment). But lawyers and bankers do not always make the best decisions in such moments.
However, we have to look beyond to how Dubai can survive this debt crunch.
The issue that needs to be addressed for Dubai is essentially $26 billion of debt for Dubai World, which is like a fly in the ointment at the moment. In essence the Dubai story is not over simply because a recovery in the region will bring focus back to the essential element that everyone asks. Where would you like to be based to do business in the Middle East? The answer is always going to be Dubai because of the investment it has made in the infrastructure, connectivity with the world, its airports and ports and most of all the UAE as a whole is a pretty safe place to be in. Yes its property market is dented, some believe taking as much as three years to repair itself, but its position as a financial hub, a tourist stop over and a traditional role as a commercial hub are not effected in any severe sense.
The most important thing Dubai must do is initiate a seven to ten year bond program, some of it supported by the government itself, and thus plug the gap between short term obligations and long term cash flows. To do this their handling of the current Sukuk crisis is important and will set the stage for restoring the dented confidence. Yes support can come from the Federal Government, as it has recently, or the Abu Dhabi controlled entities (as the recent $5 billion placement shows) and once goodwill is restored the ability to restructure may not be all that hard.
Interestingly, my banker friends tell me, prior to the November 25th standstill announcement discussions with bankers on an over all approach were going very well. Infact some even felt that an over all restructuring of the debt was a foregone conclusion. Indeed a bad public relations gambit backfired it all and focus on a smaller piece of the debt became paramount. Now the task ahead is to get back to the same level of confidence that was there three weeks back and build from there.
In the realm of a three year period the over all position of Dubai will be considerably better, even though we only look at the GDP as an indicator we forget that a substantial part of their GRE holdings are overseas and these can, in a global turn around, be crown jewels can can be sold off for a sizable profit. I believe the return to the enabling economy model where commerce, tourism and services will become the rock bed of the recovery that is highly possible.
Over the weekend Bond holders of the $4 billion Sukuk were adamant that given they have 25% of the Sukuk holders on their side they can negotiate tough to force a payment of the bonds. Failure to have this 25% might well mean that Sukuk will be restructured, and even if an enforcement is done there are complex legal issues concerning Sukuk's which, frankly, have not been tested in a court of law before. Interestingly, if Dubai government, as the shareholder of Dubai World, did want to pay this Sukuk off, then even it runs the risk of being accused of causing losses to Sukuk holders who sold the bonds after the initial announcement of the standstill, since the standstill announcement came from Dubai government and not Dubai World itself.
Paying this Sukuk is possible and if the restructuring or extension to May 2010 is agreed by more than 75% of the holders then the current issues will subside to some extent. If not then I do feel that the resources to pay this $4 billion bond will happen even though may leave many of us wondering why the whole drama happened in the first place. I suspect that when the Dubai Government announced the 'standstill' it was felt that the market would take this news positively as the government was stepping in. This clearly backfired and the market took the news they didn't like most and made a meal of it all. If I was a bond holder and a principal shareholder being the government was initiating a new plan for repayment I would rather go with it then to rely on the assets of this particular Sukuk (in this case Nakheel's land bank which is highly deflated at the moment). But lawyers and bankers do not always make the best decisions in such moments.
However, we have to look beyond to how Dubai can survive this debt crunch.
The issue that needs to be addressed for Dubai is essentially $26 billion of debt for Dubai World, which is like a fly in the ointment at the moment. In essence the Dubai story is not over simply because a recovery in the region will bring focus back to the essential element that everyone asks. Where would you like to be based to do business in the Middle East? The answer is always going to be Dubai because of the investment it has made in the infrastructure, connectivity with the world, its airports and ports and most of all the UAE as a whole is a pretty safe place to be in. Yes its property market is dented, some believe taking as much as three years to repair itself, but its position as a financial hub, a tourist stop over and a traditional role as a commercial hub are not effected in any severe sense.
The most important thing Dubai must do is initiate a seven to ten year bond program, some of it supported by the government itself, and thus plug the gap between short term obligations and long term cash flows. To do this their handling of the current Sukuk crisis is important and will set the stage for restoring the dented confidence. Yes support can come from the Federal Government, as it has recently, or the Abu Dhabi controlled entities (as the recent $5 billion placement shows) and once goodwill is restored the ability to restructure may not be all that hard.
Interestingly, my banker friends tell me, prior to the November 25th standstill announcement discussions with bankers on an over all approach were going very well. Infact some even felt that an over all restructuring of the debt was a foregone conclusion. Indeed a bad public relations gambit backfired it all and focus on a smaller piece of the debt became paramount. Now the task ahead is to get back to the same level of confidence that was there three weeks back and build from there.
In the realm of a three year period the over all position of Dubai will be considerably better, even though we only look at the GDP as an indicator we forget that a substantial part of their GRE holdings are overseas and these can, in a global turn around, be crown jewels can can be sold off for a sizable profit. I believe the return to the enabling economy model where commerce, tourism and services will become the rock bed of the recovery that is highly possible.
Monday, November 30, 2009
The Dubai World saga.
The story of Dubai World and its debt is turning into a soap opera that it really does not deserve to be. Some simple facts are being ignored from all sides, and suggests that we are all either naive or simply hoping that somehow the realities of a debt burdened company will simply change by 'talking' our way out of it. There are some essential media mistakes that indeed Dubai government officials have made and made it all the more difficult to handle then it really was.
The way I see it is that bond holders and lenders always knew that they are lending to a government owned entity without the explicit guarantee of the Government of Dubai. Whether their argument that being a shareholder of Dubai World they didn't need the guarantee to be explicit is really worthy of being tested in a court of law is still to be seen. As a former banker I am clear in that being the sole shareholder of the company doesn't mean you have guaranteed all the debts of the company, even though it may place moral responsibilities on you, strictly from a legal point of view such a guarantee is never explicit unless stated in the debt documents. This the bankers and the bond holders knew when they lent the money, even though they may argue their 'assumption' was that being a Government Related Entity (GRE) the risks of lending were less.
On the flip side of the coin, government officials who are stating that such lending to Dubai World is 'not guaranteed' may well be stating the legal position very accurately, however, they are missing a crucial part of how banks and lenders will see this statement. They will assume therefore that statements in the past three months of support for Dubai World and other GRE's were not meant in the spirit they were and with the current statement of disengaging the debt from being a government obligation, while legally correct, actually limits Dubai's ability to raise debt in the future.
This is where the much admired PR machine of Dubai has totally failed. In the first place what was the need for the 'standstill' statement on November 25th? They should have first had discussions with the bond holders and agreed a 'rollover' or 'extension' and then AFTER an agreement on the matter or otherwise made a statement. Secondly, when all the uproar is going on, why should a government official go on TV and state the obvious 'the government has not guaranteed the debts of Dubai World'. This is known to the bond holders, why say it again?
I am asked often about what I would do in this situation. Well first I am not fully aware of the all the financial matters within Dubai World so I am venturing a guess of a strategy that I believe will work, and perhaps will be excused not knowing the exact asset details that Dubai World. But in essence this is what I would do.
1. Dubai Government to state that yes it is the shareholder of Dubai World and given it is taking a more direct oversight of the current situation it is going to issue a White Paper on the status of Dubai World. It should then commission this study.
2. The Government along with Dubai World management should issue a statement of its total assets and assume they are, as some reports suggested in the past US$75 billion, then state how much of that is impaired with the current global financial situation.
3. Given that a major problem has been the mismatch of funding to the projects it should then offer a new program of debt which would be in chunks of three years, five years and seven years. The longer term debt could be supported by the Government of Dubai, or specific assets, or a combination of both. All short term debt holders then be convinced through a proper dialogue to participate in the longer term restructured debt, and where possible seek support from regional long term fund providers, be they from Abu Dhabi, or Federal Bodies, or even GCC banks.
4. Consider a selective program, stated now as an intent, to take some of the parts of Dubai World public through IPO's and in some cases with the recovery of the world economic situation, to even consider selling them off to repay debt.
5. Create a single platform for communication on the debt issue and related matters to avoid statements from all over the place.
While this all may sound simplistic, but I believe these steps will be better than what is the situation today. Lenders will be happier to have a true dialogue with the stakeholders rather than talking through the press on these matters. I do believe that as confidence is restored through these steps the over all picture will improve exponentially and restore much need confidence back to the system.
The way I see it is that bond holders and lenders always knew that they are lending to a government owned entity without the explicit guarantee of the Government of Dubai. Whether their argument that being a shareholder of Dubai World they didn't need the guarantee to be explicit is really worthy of being tested in a court of law is still to be seen. As a former banker I am clear in that being the sole shareholder of the company doesn't mean you have guaranteed all the debts of the company, even though it may place moral responsibilities on you, strictly from a legal point of view such a guarantee is never explicit unless stated in the debt documents. This the bankers and the bond holders knew when they lent the money, even though they may argue their 'assumption' was that being a Government Related Entity (GRE) the risks of lending were less.
On the flip side of the coin, government officials who are stating that such lending to Dubai World is 'not guaranteed' may well be stating the legal position very accurately, however, they are missing a crucial part of how banks and lenders will see this statement. They will assume therefore that statements in the past three months of support for Dubai World and other GRE's were not meant in the spirit they were and with the current statement of disengaging the debt from being a government obligation, while legally correct, actually limits Dubai's ability to raise debt in the future.
This is where the much admired PR machine of Dubai has totally failed. In the first place what was the need for the 'standstill' statement on November 25th? They should have first had discussions with the bond holders and agreed a 'rollover' or 'extension' and then AFTER an agreement on the matter or otherwise made a statement. Secondly, when all the uproar is going on, why should a government official go on TV and state the obvious 'the government has not guaranteed the debts of Dubai World'. This is known to the bond holders, why say it again?
I am asked often about what I would do in this situation. Well first I am not fully aware of the all the financial matters within Dubai World so I am venturing a guess of a strategy that I believe will work, and perhaps will be excused not knowing the exact asset details that Dubai World. But in essence this is what I would do.
1. Dubai Government to state that yes it is the shareholder of Dubai World and given it is taking a more direct oversight of the current situation it is going to issue a White Paper on the status of Dubai World. It should then commission this study.
2. The Government along with Dubai World management should issue a statement of its total assets and assume they are, as some reports suggested in the past US$75 billion, then state how much of that is impaired with the current global financial situation.
3. Given that a major problem has been the mismatch of funding to the projects it should then offer a new program of debt which would be in chunks of three years, five years and seven years. The longer term debt could be supported by the Government of Dubai, or specific assets, or a combination of both. All short term debt holders then be convinced through a proper dialogue to participate in the longer term restructured debt, and where possible seek support from regional long term fund providers, be they from Abu Dhabi, or Federal Bodies, or even GCC banks.
4. Consider a selective program, stated now as an intent, to take some of the parts of Dubai World public through IPO's and in some cases with the recovery of the world economic situation, to even consider selling them off to repay debt.
5. Create a single platform for communication on the debt issue and related matters to avoid statements from all over the place.
While this all may sound simplistic, but I believe these steps will be better than what is the situation today. Lenders will be happier to have a true dialogue with the stakeholders rather than talking through the press on these matters. I do believe that as confidence is restored through these steps the over all picture will improve exponentially and restore much need confidence back to the system.
Sunday, November 29, 2009
Dubai World: A spin that is hard to follow.
Dubai's debt woes have captured the world news attention, with articles written by people who are familiar with the region and the issues, and some obscure journalists who would be hard pressed to find Dubai on the world map. My three decades of experience living in UAE, and almost all of it in the financial sector, as a participant and observer, has taught me that in many cases the depth of the problems may well never be known, but in equal measure the efforts going into the solutions are always clouded in a measure of secrecy.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
Friday, November 27, 2009
Dubai's Debt Surprise
Almost thirty years back if someone had told me that a financial event in the Emirate of Dubai would shock world markets I would have smiled, sipped my tea and wondered what the person making such a statement was smoking. Three decades on, and with highways, a Metro, the tallest buildings in the world and an assortment of what were commonly called Dubai's crown jewels, Dubai had become, till the mid of last year, the choice economy to comment upon. Yet suddenly, with perhaps the worst timing possible, a terse announcement of a major Dubai conglomerate asking the banks for a 'standstill' on its debt, Dubai became the center piece of not only a financial crisis around the world but also the whipping horse for the financial press. The fact that the Dubai Debt Crisis has become a talking point is not a surprise, after all the US governments debt is also worrying at times through our civilizations financial history, however the way all this has been revealed has been more of a shock. The following reasons for this stand out.
1. Why publicly ask for a 'standstill', when the English financial dictionary has more subtle words like 'roll over', 'extension' and 'renegotiate' that are available to soften the impact of what is being asked for?
2. Why time the decision a day before the local markets will be closed for an extended holiday and the international markets going into Thanks Giving?
3. Why not explain the connection between a tacit Government announcement a month back that the debt would be met, and also the arrangement $5 billion of fresh debt the very day an old debt is being placed on 'standstill'?
Indeed the questions are many and the answers have been few. The fact that the episode, if I may call it that, has not been handled elegantly is an understatement. Yet analysts will be wondering where do we go to from this juncture? I believe a few explanations may shed light on this bizarre handling of events, given that a debt of almost similar size maturing on November 30, 2009 was successfully rolled over, why a debt maturing two weeks later has been so badly managed?
A. I believe that proper advice from seasoned bankers was not taken and had it been so then the possibility of a debt roll over was more easily possible than such a blunder. If the intention was to financially protect the assets of DP World then when the Sukuk was trading at around 65 it could have been a better time (about eight months back) to simply ask for a 'standstill' or a retirement of the debt and save over 55% of the $4.5 billion bond value (it was set to mature at 115). So I do not believe the intention was to 'default' but more likely to get some breathing room.
B. If the intent is to get breathing room then the fact that the committee managing Dubai's financial matters has been recently restructured (only a week back), they could have gone to the banks and bond holders and suggested that as the new committee gets a grip of things time is needed so a breather is requested and an extension is necessary.
C. It would well be that a distinction is being drawn between direct Dubai Government debt and the debt of Dubai owned corporations who do not have explicit Dubai Government debt insurance or guarantees. While this is a dangerous course to take in the current environment it does nevertheless stress that the point has been made and might well lead to the Government then 'stepping in' to retire the debt and in effect negotiate with the banks that a retirement should be followed by fresh debt against the full faith of the government itself. This is a tricky path given that the very faith that backed this lending has been dented by the way the 'standstill' was handled.
D. The fact that another US$ 5 billion is on tap from the second tranche of the US$10 billion bond offering (of which the first $5 billion was placed the same day of this dreadful announcement) indicates that there is a possibility that this will be tapped immediately to cover the DP World bond needs by December 14, 2009.
All these routes all may well put some badly needed band aid on the wounds to the reputation of Dubai, but for the long run it will be clear that Dubai will need better advice of how to handle already frayed nerves of bankers and bond holders. Will there be enough goodwill left on the table for all parties to carry the trust forward is a matter that will be tested in the coming weeks and months. While the debt seems large and perhaps unmanageable, the truth is that Dubai had the goodwill to have steered through these waters. Now bankers feel that goodwill was cast aside in large measure not by what was needed to be done, but how it was done.
Yet I would be optimistic for this being resolved simply because at some level parties within the UAE will stop seeing this as Dubai's embarrassment and realize its an embarrassment for the UAE as a whole. It is at this level that the matter can best be resolved and I suspect this will be the way this will be solved.
1. Why publicly ask for a 'standstill', when the English financial dictionary has more subtle words like 'roll over', 'extension' and 'renegotiate' that are available to soften the impact of what is being asked for?
2. Why time the decision a day before the local markets will be closed for an extended holiday and the international markets going into Thanks Giving?
3. Why not explain the connection between a tacit Government announcement a month back that the debt would be met, and also the arrangement $5 billion of fresh debt the very day an old debt is being placed on 'standstill'?
Indeed the questions are many and the answers have been few. The fact that the episode, if I may call it that, has not been handled elegantly is an understatement. Yet analysts will be wondering where do we go to from this juncture? I believe a few explanations may shed light on this bizarre handling of events, given that a debt of almost similar size maturing on November 30, 2009 was successfully rolled over, why a debt maturing two weeks later has been so badly managed?
A. I believe that proper advice from seasoned bankers was not taken and had it been so then the possibility of a debt roll over was more easily possible than such a blunder. If the intention was to financially protect the assets of DP World then when the Sukuk was trading at around 65 it could have been a better time (about eight months back) to simply ask for a 'standstill' or a retirement of the debt and save over 55% of the $4.5 billion bond value (it was set to mature at 115). So I do not believe the intention was to 'default' but more likely to get some breathing room.
B. If the intent is to get breathing room then the fact that the committee managing Dubai's financial matters has been recently restructured (only a week back), they could have gone to the banks and bond holders and suggested that as the new committee gets a grip of things time is needed so a breather is requested and an extension is necessary.
C. It would well be that a distinction is being drawn between direct Dubai Government debt and the debt of Dubai owned corporations who do not have explicit Dubai Government debt insurance or guarantees. While this is a dangerous course to take in the current environment it does nevertheless stress that the point has been made and might well lead to the Government then 'stepping in' to retire the debt and in effect negotiate with the banks that a retirement should be followed by fresh debt against the full faith of the government itself. This is a tricky path given that the very faith that backed this lending has been dented by the way the 'standstill' was handled.
D. The fact that another US$ 5 billion is on tap from the second tranche of the US$10 billion bond offering (of which the first $5 billion was placed the same day of this dreadful announcement) indicates that there is a possibility that this will be tapped immediately to cover the DP World bond needs by December 14, 2009.
All these routes all may well put some badly needed band aid on the wounds to the reputation of Dubai, but for the long run it will be clear that Dubai will need better advice of how to handle already frayed nerves of bankers and bond holders. Will there be enough goodwill left on the table for all parties to carry the trust forward is a matter that will be tested in the coming weeks and months. While the debt seems large and perhaps unmanageable, the truth is that Dubai had the goodwill to have steered through these waters. Now bankers feel that goodwill was cast aside in large measure not by what was needed to be done, but how it was done.
Yet I would be optimistic for this being resolved simply because at some level parties within the UAE will stop seeing this as Dubai's embarrassment and realize its an embarrassment for the UAE as a whole. It is at this level that the matter can best be resolved and I suspect this will be the way this will be solved.
Tuesday, August 18, 2009
Dubai: Deflation path to Recovery
Sitting on the inside, watching the economic crisis is not more a secluded exercise. This economic meltdown is a world wide episode, with ramifications that have not been quite fully understood, especially by the actors who are expected to bring about a change in this scene we stare at. As the global crisis has unfolded its own unique economic tsunami the effects of it have manifest itself in each country in a rather different way. While focus has remained on the United States in terms of the sheer size of its economy, large consumer economies like China and India has been better placed to absorb the tidal waves given that there is a basic level of consumer demand that does need fulfillment.
Dubai has received a great of attention from the world media, and understandably so; during the boom years it was the darling of the media world, and as it is learning, in the down days the same writers who showered accolades are the first ones to throw eggs. This does not mean that the entire negative press is not without foundation, but more like exaggerated to the point of sensationalist fear. For the record yes the recession has hit Dubai hard, and understandably so as it had the most grandiose of plans in the region. The debate rages over the size of its financial commitments and what it will do to revive the economy.
I would say three decades in the region, two of which were in banking, gives me more perspective than a reporter who perhaps would think of a story over a month at best. First of all Dubai has been what I have always called an 'enabling economy', whereby it has created the infrastructure for private sector to thrive. Though, understandably, over the past decade over zealous government officials donned the entrepreneurial hat and goaded the government to become in effect the biggest business conglomerate, having the disadvantage that it pushed the cautious private sector to the sidelines and yet having the advantage that government funding would ensure completion of the grand design. We must remember it was not the real estate sector that caused the problem it was a combination of financial issues within the banking sector and the effects of the global economy that started the downward spiral.
To explain this further one has to appreciate that in middle to late 2008 there was widespread speculation and debate that the UAE will delink the Dihram from the US dollar, a fixed rate that has been unchanged since 1970's. This speculation drove through most of the early part of 2008 substantial funds from Hedge Funds in Europe and elsewhere into the banking system in the UAE expecting a delinking will mean a stronger UAE Dihram. This did not happen and when in September or so last year the UAE Central Bank made its position public that there was no such delinking on the cards, billions of dollars playing this trade and sitting in the banks here too flight. Ofcourse in a sense the hedge funds had their own problems brewing with the sub prime crisis and a stock market that was not entirely comfortable.
The problem would not have been more than that it seems had some fundamental errors not taken place. So lets say $15 billion comes to the banks here, is laying in deposit waiting for the delinking, the delink does not happen the money leaves so no big deal. However, our clever bankers, and I was one of them a decade back, had lent a substantial part of these funds to domestic borrowers, so when the delink did not happen and the funds went back almost every bank was caught with their loan to deposit ratio (which is normally 80-85%) suddenly find they had more loans on their books then deposits to fund them. Well established banks with loads of liquidity were caught with a ration of close to 135% on loans to deposits. Given that international banks were stuck with their own problems even the inter bank market was struggling to fund the banks here.
The timing of all this was smack in the middle of the meltdown happening thus closing the door to the one thing that could have made this crisis less dramatic; the access to liquidity. If the banks had not been so exposed then in a nervous market more monetary moves to increase liquidity in the banking system would have given the buffer to soften the blow. This is what happened in India where huge amounts of liquidity were pumped into the banking system to make sure the consumer did not panic.
This does not mean the real estate crisis would not have happened. I am only arguing that it would not have been so serve and more importantly one has to then question was the rationale for the development model for Dubai wrong? I do not believe the model was wrong, but two things needed adjustment that just did not happen.
1. The size and scale of the development was not tuned into the sustainable demand levels.
2. The role of private sector should have been the bigger chunk of the development cake rather than end up making government owned companies the biggest competitor to the private sector.
I am often asked a question about how long this recession will last and how will Dubai come out of it?
In the first place the recession is a global event and while France, China, India and Germany have shown signs of weathering the storm better, the chances are that towards the fourth quarter of 2009 the financial elements needed for a recovery will be in better shape. This deflation we have seen globally, and in Dubai, was needed for two reasons, one to slow down an over heating economy, and secondly to bring some value back to the process of development. I believe that consumer confidence will stabilize towards the end of this year and net investments will begin to show an increase in the first quarter of next year. Yes this is totally contrary to what some leading bank researchers are saying that we have another 18 months of hardship, but trust me I know that crowd well, they are the same researchers who a year back were predicting some very exuberant predictions.
The way Dubai will come out of this is actually simpler than it looks. While the current funding of Government Bonds of $ 20 billion as a first step forward Dubai has a good collection of companies it can privatize, from airlines to hotels and property companies too. The question is the timing of such privatizations and whether this is the route to take. I believe the enabling element of Dubai's economy means in the region it is the best suited in terms of ease of business and infrastructure to be the place of first choice for regionally based companies. I believe a spending spree in Iraq on account of rebuilding the country will commence early next year, this backed up with a higher oil price will bring stability to the region and a demand led economy will emerge, but gradually. UAE and Dubai are best positioned to take advantage of the support role it will perform and this is where there base of the demand side of the equation will come to the economy.
This does not mean that the government of Dubai should not rethink their role in the economic model. I think they should go towards being more an enabler and privatize some of the business concerns, perhaps with the timing of the first offerings to be in the early part of next year. There should also be a revisit to some of the more grand projects and these should be put on the back burner and bring back the confidence that with some projects shelved the expect financial load will be substantially less. As I said to someone the other day "You can still plan to do all you wanted but just don't do them at the pace you were trying to.'
Dubai has received a great of attention from the world media, and understandably so; during the boom years it was the darling of the media world, and as it is learning, in the down days the same writers who showered accolades are the first ones to throw eggs. This does not mean that the entire negative press is not without foundation, but more like exaggerated to the point of sensationalist fear. For the record yes the recession has hit Dubai hard, and understandably so as it had the most grandiose of plans in the region. The debate rages over the size of its financial commitments and what it will do to revive the economy.
I would say three decades in the region, two of which were in banking, gives me more perspective than a reporter who perhaps would think of a story over a month at best. First of all Dubai has been what I have always called an 'enabling economy', whereby it has created the infrastructure for private sector to thrive. Though, understandably, over the past decade over zealous government officials donned the entrepreneurial hat and goaded the government to become in effect the biggest business conglomerate, having the disadvantage that it pushed the cautious private sector to the sidelines and yet having the advantage that government funding would ensure completion of the grand design. We must remember it was not the real estate sector that caused the problem it was a combination of financial issues within the banking sector and the effects of the global economy that started the downward spiral.
To explain this further one has to appreciate that in middle to late 2008 there was widespread speculation and debate that the UAE will delink the Dihram from the US dollar, a fixed rate that has been unchanged since 1970's. This speculation drove through most of the early part of 2008 substantial funds from Hedge Funds in Europe and elsewhere into the banking system in the UAE expecting a delinking will mean a stronger UAE Dihram. This did not happen and when in September or so last year the UAE Central Bank made its position public that there was no such delinking on the cards, billions of dollars playing this trade and sitting in the banks here too flight. Ofcourse in a sense the hedge funds had their own problems brewing with the sub prime crisis and a stock market that was not entirely comfortable.
The problem would not have been more than that it seems had some fundamental errors not taken place. So lets say $15 billion comes to the banks here, is laying in deposit waiting for the delinking, the delink does not happen the money leaves so no big deal. However, our clever bankers, and I was one of them a decade back, had lent a substantial part of these funds to domestic borrowers, so when the delink did not happen and the funds went back almost every bank was caught with their loan to deposit ratio (which is normally 80-85%) suddenly find they had more loans on their books then deposits to fund them. Well established banks with loads of liquidity were caught with a ration of close to 135% on loans to deposits. Given that international banks were stuck with their own problems even the inter bank market was struggling to fund the banks here.
The timing of all this was smack in the middle of the meltdown happening thus closing the door to the one thing that could have made this crisis less dramatic; the access to liquidity. If the banks had not been so exposed then in a nervous market more monetary moves to increase liquidity in the banking system would have given the buffer to soften the blow. This is what happened in India where huge amounts of liquidity were pumped into the banking system to make sure the consumer did not panic.
This does not mean the real estate crisis would not have happened. I am only arguing that it would not have been so serve and more importantly one has to then question was the rationale for the development model for Dubai wrong? I do not believe the model was wrong, but two things needed adjustment that just did not happen.
1. The size and scale of the development was not tuned into the sustainable demand levels.
2. The role of private sector should have been the bigger chunk of the development cake rather than end up making government owned companies the biggest competitor to the private sector.
I am often asked a question about how long this recession will last and how will Dubai come out of it?
In the first place the recession is a global event and while France, China, India and Germany have shown signs of weathering the storm better, the chances are that towards the fourth quarter of 2009 the financial elements needed for a recovery will be in better shape. This deflation we have seen globally, and in Dubai, was needed for two reasons, one to slow down an over heating economy, and secondly to bring some value back to the process of development. I believe that consumer confidence will stabilize towards the end of this year and net investments will begin to show an increase in the first quarter of next year. Yes this is totally contrary to what some leading bank researchers are saying that we have another 18 months of hardship, but trust me I know that crowd well, they are the same researchers who a year back were predicting some very exuberant predictions.
The way Dubai will come out of this is actually simpler than it looks. While the current funding of Government Bonds of $ 20 billion as a first step forward Dubai has a good collection of companies it can privatize, from airlines to hotels and property companies too. The question is the timing of such privatizations and whether this is the route to take. I believe the enabling element of Dubai's economy means in the region it is the best suited in terms of ease of business and infrastructure to be the place of first choice for regionally based companies. I believe a spending spree in Iraq on account of rebuilding the country will commence early next year, this backed up with a higher oil price will bring stability to the region and a demand led economy will emerge, but gradually. UAE and Dubai are best positioned to take advantage of the support role it will perform and this is where there base of the demand side of the equation will come to the economy.
This does not mean that the government of Dubai should not rethink their role in the economic model. I think they should go towards being more an enabler and privatize some of the business concerns, perhaps with the timing of the first offerings to be in the early part of next year. There should also be a revisit to some of the more grand projects and these should be put on the back burner and bring back the confidence that with some projects shelved the expect financial load will be substantially less. As I said to someone the other day "You can still plan to do all you wanted but just don't do them at the pace you were trying to.'
Subscribe to:
Posts (Atom)