Monday, November 30, 2009

UAE central bank readies liquidity facility for second-largest Arab economy

The UAE central bank intervened yesterday, setting up an emergency liquidity facility for lenders in the second-largest Arab economy. Its move was designed to head off a run on local banks when they re-open today after a four-day holiday.

The rulers of Abu Dhabi are expected to make a statement before the markets open on whether they will bail out Dubai and which businesses and projects will be rescued. Such a statement would be a key test of financial stability in the region.

Senior analysts in the region expect that projects regarded as folly will not be backed but operations and investments with a strong business model will be. Restructuring of the debts on those had already been started by investment bankers at Rothschild and accountants at Deloitte.

KPMG is expected to be confirmed this week as lead adviser to the biggest creditors to Dubai World, including British banks. Western banks welcomed the UAE central bank action but analysts called it “a holding tactic”.

The central bank said that it “stands behind local and foreign banks operating in the country”. Peter Sands, the chief executive of Standard Chartered, which has lent about $US8bn to Dubai, said: “The central bank has acted decisively and pragmatically. Their support for the banking system will underpin consumer and market confidence in the economy.”

Raj Madha, a banking analyst at EFG Hermes, an investment bank based in Egypt, said that further measures were required. He said that the facility “may be enough to stop any liquidity drain gaining momentum tomorrow, but they need to clarify the long-term health of the banking sector by a guarantee of loans or by offering to buy up exposure.”

Last night, the rulers of Dubai and Abu Dhabi, its much richer sister emirate, were locked in fraught talks about the terms of a potential rescue.

The UAE central bank is advised by Oliver Wyman, the management consultancy, and has held talks with the office of Sheikh Mansour bin Zayed al-Nahyan, the multibillionaire whose investment fund owns Manchester City Football Club.

Today will mark the first key test of whether Dubai will default on its estimated $US88bn debt pile, when interest payments of about $US138 million become due on a $US2bn bond issue by Jebel Ali Free Zone Authority, a unit of Dubai World.

Abu Dhabi, which sits on one-tenth of the world’s oil reserves, has the world’s largest sovereign wealth fund, valued at $US700bn. It can afford to bail out Dubai but is thought to be driving a tough deal, possibly demanding control of key assets, such as Emirates Airline.

Projects begun but not completed include the $US20bn Dubai Land, 3bn sq ft of theme parks, shopping centres, hotels and residential properties due to be completed in 2018; the $US15bn Dubai Festival City, a 1300-acre complex of schools, hotels, offices and leisure facilities to be completed in 2020; and The Lagoons, a $US17.7bn development of seven islands, to be completed next year.

In a related development, Dubai censors scrambled to stop The Sunday Times reaching news stands yesterday. SAB Media, the Dubai licensee, was told the paper was blocked from distribution. No reason was given but the recall was probably prompted by an illustration of Sheikh Mohammed bin Rashid Al Maktoum swept away in a wave of debt. In Dubai, it is illegal to produce a derogatory image of the ruler or to deface his picture.

The Australian

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