Abu Dhabi is providing $10 billion in funding to bail out its neighboring Dubai, enabling it to settle a $4.1 billion sukuk or Islamic bonds owned by troubled developer Nakheel, which were maturing on December 14th.

Dubai government announced that the remaining funds would be used to meet the needs of existing creditors and contractors.
Nakheel -- Dubai World’s property unit -- is groaning under $8 billion in debt, is seeking ways to recapitalize its balance sheet to match its short-term liabilities with long-term real estate development plans. The company has had to put an indefinite hold on many projects as cash flow and financing dried up.
Nakheel was unable to come up with the funds by selling its assets because most of its projects are still in development phase.
Dubai World sent shock waves across the world markets when on December 1 it announced postponement of payments of its reported $26 billion in debts for six months, until April 30.
From world’s tallest tower, to indoor ski slopes, artificial archipelagos built into the sea, refrigerated beach sand, to eight star hotels, and the list goes on for Dubai World’s projects. These fantasy places were constructed on the back of loans and cheap labor, making $5 a day, from places like Ethiopia, Bangladesh, and the Philippines. The living conditions of these labors have been criticized by media.
Last week creditors were scrambling to figure out which companies’ debts are guaranteed by the government. The crisis has damaged the emirate’s reputation badly and is likely to keep lenders away for a long time.
As the cash flow has dried up property prices in Dubai have halved. Creditors should have been cautious with Dubai’s overheated real estate market and high leverage.
Regional markets
The oil-rich Abu Dhabi’s aid news hiked Dubai’s Financial Market by 10.1 percent, led by property giant Emaar.
Emaar, 32 percent owned by the government of Dubai and the developer of Burj Dubai, the world’s tallest building, is a public joint stock company and is a bellwether stock of the Dubai Financial Market.
Stocks across the region also gained. Abu Dhabi rose 7.5 percent and Qatar gained 2.4 percent, while Kuwait, Muscat and Bahrain’s exchanges added 0.4 percent, 2.1 percent and 1 percent respectively.
Earlier in February, Dubai raised $10 billion in bonds from the UAE central bank. The $20 billion bond program is under the supervision of Dubai Financial Support Fund, which will pay the Nakheel Sukuk before a two-week grace period ending December 28.
A group of international and regional banks met Dubai’s struggling conglomerate, Dubai World, for the first time on Dec. 7 as talks began on the company’s request to restructure debts of $26 billion.
RBS, Standard Chartered, HSBC, Lloyds Banking Group and two UAE banks -- began forming a steering committee under the aegis of KPMG, which is expected to be appointed to represent creditors.
British banks are believed to have an aggregate total of $5 billion exposure to Dubai World.
Emirates National Bank of Dubai is the biggest single creditor with outstanding lending of about $3 billion.
Background
Fact is that this financial storm had been brewing since October of 2008, when the Kuwaiti Central Bank’s intervention became the first bank rescue in the region.
At that point oil prices had already stumbled 50 percent, since the all time record high of $147 per barrel in July 2008. The Persian Gulf economies looked vulnerable to the global financial crisis for the first time as investors started to pull out.
By that time Dubai’s highly leveraged real estate started to see signs of weakness for the first time in years, as financing dried up and investors bowed out. Analysts say that it was a good time for the debt driven Dubai economy to make the necessary changes.
By November 2008, there were reports of 40 percent slump in some developments. Instead of paying heed, the Finance Ministry in Dubai pumped $19 billion into the financial system to allow banks to continue lending to local projects.
Today Dubai’s real estate market, where correction was long overdue, has plunged 50 percent.
Iranian-Dubai ties
Dubai has been a close trade partner of Iran. In 2008, Iran-Dubai trade stood at $12 billion out of which Iranian exports constituted $2 billion.
There are some 400,000 Iranian expatriates in UAE, most of them have invested in business and real estate. An estimated 10,000 Iranian firms are registered in Dubai, which is also one of the top destinations for Iranian tourists.
The United States claims that through Dubai many of the trade sanctions it has imposed on the Islamic Republic are bypassed. Analysts claim that the reason why Abu Dhabi initially refused to bail out Dubai was to pressure the city-state to cut its business links with Iran.
According to German news agency DPA, some 30 percent of Iranian expatriates have returned abandoning their businesses in Dubai. In the various ports of Dubai one can witnesses Iranian expatriates loading their freight onto the ship in order to return.
Capital flight
Iranian expatriates have not been the only ones to return. The financial turmoil today can also be partly attributed to the flight of capital from the country.
Dubai opened its doors, guaranteeing residence permits to foreigners who purchased real estate, at the start of this decade. As a result expatriates, many of them Iranians, poured into the country creating a real estate boom.
Since last year there have been reports of brand new cars being found abandoned in the Dubai International Airport by expatriates who had purchased the vehicles with loans that they were unable to pay back.
As foreigners, which constitute 90 percent of the city-state’s population, pulled out inter-bank lending also dried. According to a Financial Times analysis some $54 billion of foreign deposits had fled UAE by October of 2008.
However, most of the Arab countries in the Persian Gulf are not susceptible to this kind of loss because of their energy wealth. According to Marill Lynch the oil rich states enjoy a budget surplus as long as the price of oil remains above $50 a barrel. In Saudi Arabia, that number is as low as $30 a barrel. So countries like Saudi Arabia, Qatar, or Kuwait remained well placed to face the global financial meltdown.
Lacking any significant deposits of oil or gas, Dubai is a net importer of energy, and should have been more conservative than its energy-rich neighbors.
Dubai’s troubles are not all due to mistakes. Just a few decades ago this sprawling city was a desert. Today, it is the tourist, transit and financial hub of the region.
Anyhow, analysts believe that Dubai will swim out of this storm.
Photo: Dubai's ruler Sheik Mohammed bin Rashid Al Maktoum, second from right, speaks to the media in Dubai, United Arab Emirates, Dec. 1, 2009. Abu Dhabi stepped in to help fellow UAE member Dubai with a $10 billion injection. (AP photo)