UAE. Dubai World, the holding company for the developer of the man-made Palm islands and what will become the world's tallest tower, said it has no problem borrowing and disputed forecasts that the Gulf state will need help from neighbouring Abu Dhabi.
Government-controlled companies owe at least US$47 billion, more than Dubai's gross domestic product, and are accumulating debt at a faster pace than the economy is growing, Moody's Investors Service said in a report yesterday. Dubai's "potential reliance'' on neighbouring Abu Dhabi may be "most significant'' in coming years, Moody's analysts said.
"We don't have any problem raising money,'' Dubai World Chairman Sultan Bin Sulayem said in a telephone interview today. "Why would we announce a big tower if we can't afford to pay for it?''
Dubai's state companies have lost at least US$6 billion on their five biggest public investments in the past two years, led by Dubai World's stake in casino operator MGM Mirage. Losses on undisclosed investments may be US$30 billion, said Luis Costa, emerging-markets debt strategist at Commerzbank in London.
"About 80% of Dubai World is non-transparent, so it's a very tough game,'' said Costa. "Deals such as the world's tallest tower may now need more capital injection from the state or may even fail.''
Ruler of Dubai Sheikh Mohammed bin Rashid has borrowed to fuel the necessary infrastructure developments and to diversify Dubai's dwindling revenue from oil with earnings from tourism, finance and real estate. State-owned airline Emirates has increased its fleet to the largest in the Middle East and has the most orders worldwide for the Airbus A380 superjumbo, as the government seeks to double tourists per year to 15 million by 2015.
Dubai World owns DP World, the third-largest international port operator, Istithmar World, a private equity firm that acquired Barney's New York last year, and Nakheel, builder of the manmade palm-shaped islands in the Persian Gulf. The developer is also building the Nakheel Tower, which will surpass the Burj Dubai, currently the world's tallest at 707 metres.
DP World, which bought Peninsula and Oriental Steam Navigation Co for US$6.8 billion in 2006, has slumped 50% this year on the Dubai International Financial Exchange.
Dubai World agreed to pay about US$5.1 billion for almost 10% of Kirk Kerkorian's MGM Mirage last year; the price has tumbled since to US$16.80 from US$84.
"We are not speculators; we do not buy to sell,'' bin Sulayem said today. "Anything we buy we keep for at least five years.''
Plans to build hotels and resorts with MGM in Dubai and around the world are "going ahead,'' he said.
Dubai has attracted some of the world's largest companies, including Microsoft Corp, Merrill Lynch & Co and American Investment Group (AIG) to tax-free business parks, spurring the development of finance, media and technology industries.
The model, copied by Qatar and Saudi Arabia, swelled the population of immigrant workers to outnumber Emirati nationals by ten to one and drove a quadrupling in real-estate prices in the past five years, according to property data from Dubai-based investment bank Al Mal Capital.
The global credit crunch triggered by falling US house prices is halting Dubai's real-estate boom and putting pressure on bank finances. The UAE government said today it will provide US$19 billion for banks, taking the total made available in the last month to US$33 billion.
Developers will find it harder to borrow as Dubai's property prices fall by 10% through the end of next year, according to Morgan Stanley, although not everyone agrees with this prediction.
"There is pressure on refinancing for property companies,'' Mai Attia, a Dubai-based property analyst at Morgan Stanley, said in a phone interview today. "There will be major outflow in the short term and the question is how they will refinance maturing debt.''
Abu Dhabi, by contrast, owns more than 90% of the UAE's oil reserves and almost 8% of the world's total. The Abu Dhabi Investment Authority, its sovereign wealth fund is the world's largest with as much as US$875 billion in assets, according to the International Monetary Fund.
Moody's expects a "high level'' of support from Abu Dhabi for the "most important'' publicly-owned companies.
While Dubai World manages companies on behalf of the Emirate of Dubai, assets belonging to Sheikh Mohammed including hotel chain Jumeirah Group are run by Dubai Holding. The companies control about two-thirds of the Dubai real-estate market.
The cost to protect Dubai Holding's debt against default jumped almost four-fold in the past six months to 684 basis points, the highest in at least four years, according to traders of credit-default swaps.
Dubai Holding Commercial Operations Co's 10-year bonds due 2017 fell 0.8% today, lifting the yield to a record 13.2%, Bloomberg data shows.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
"We are a very solid company and well diversified,'' bin Sulayem said. The notion of Dubai corporations having to rely on Abu Dhabi for funding "is news to me,'' he said.