Dubai's Debt Crisis and the Ascent of Abu Dhabi

The recent debt crisis in Dubai caused worldwide concern over the long-term financial stability not just of the emirate itself, but also of other smaller global states. On 25 November 2009, the Dubai government announced that its troubled flagship investment company Dubai World intended “to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010.” In the weeks following the announcement, international investor confidence in the troubled state hit an all time low and speculation abounded as to the eventual impact on other regional economies.

Last week the International Monetary Fund downgraded its growth forecast for Dubai, predicting that the emirate's economy would contract for the second year in a row. This followed Standard & Poor's decision to downgrade five of Dubai's top state-owned companies to below investment grade. The rating agency placed DIFC Investments, DP World, Jebel Ali Free Zone, Dubai Holding Commercial Operations Group and Emaar Properties on CreditWatch and stated that it regarded investments in these companies as “highly speculative”.

Dubai's oil-rich neighbour Abu Dhabi was quick to lend financial support to its fellow emirate, with a bailout package of USD 10 billion announced on 14 December 2009. This much needed show of support mollified nervous investors and resulted in a 10.4% increase in Dubai's main index over the course of the day. Much of the support package will go towards bailing out Dubai World until the end of April. Without Abu Dhabi's support, Dubai World would have been at risk of defaulting on its Islamic bond payments - an event that would have plunged the whole region into financial crisis.

Following Abu Dhabi's show of support for its neighbour, analysts have begun to revise their initial view on the extent to which Dubai's crisis is likely to hit investor confidence in the UAE. Indeed, Dubai is unique in the region, lacking the oil wealth of its neighbours. The emirate was once heralded as a shining light in the region - a progressive Arab state proving new business growth opportunities away from oil. Dubai’s current turmoil leads to questions about the long term prospects of the whole Middle East, highlighting its continuing dependence on oil, as well as the slow rate of regional diversification.

Nevertheless, countries such as Saudi Arabia, Kuwait, Qatar and Abu Dhabi can still look forward to a more stable future due to their ownership of two thirds of the world's oil reserves and 45 per cent of its gas reserves. All four countries enjoy low levels of debt and have all benefited from recent increases in the price of oil.

Masood Ahmed, the IMF's director for the Middle East and Central Asia, recently stated that the initial panic that had gripped the world's investors following Dubai's debt crisis and had led to fears over possible knock on effect on Dubai's neighbours had now given way to the general belief that the crisis was an “idiosyncratic Dubai event.”

In fact, in many ways Dubai's troubles are likely to result in future benefits for its neighbours, especially Abu Dhabi, which is now likely to enjoy increased dominance in the region as its once glittering sister emirate finds its global image tarnished and regional influence curtailed.

Whilst Dubai was long seen as a shining example of regional economic strength and seemingly unstoppable growth, Abu Dhabi has maintained a far more subdued image. However this has always hidden the fact that Abu Dhabi has always been one of the regions economic powerhouses and has long been seen as a desirable location for international companies.

Speaking to the Financial Times, regional expert Michael Field recently explained: “Dubai is going to be subject to a significant squeeze. Bit by bit it will find itself having to do what Abu Dhabi says.”

Opportunities still abound for international businesses in the UAE, but recent events have ensured that Dubai, once regarded as an unstoppable centre of growth and prosperity, will now have to move aside to allow its less flashy, but ultimately more economically stable, sister emirate to share the limelight. As with Aesop's fable of the Hare and Tortoise, it seems that, ultimately, slow and steady wins the race.