Dubai: Awaiting A Major Statement Today

There is still confusion as to whether the statement last week relates to all of Dubai World, including DP World, the ports business, or just the troubled property arm, Nakheel, which has a $US4 billion Islamic bond falling due on December 14.

Markets and investors are looking to the statement expected today to provide a lot more clarification and detail.

Dubai and much of the Middle East has been shut since Thursday for the Eid religious holiday.

Asian and US markets took a pounding on Friday, but Europe recovered some of its poise.

That was on the growing understanding that while a shock, the size of the debt involved is not life threatening to any bank or economy outside of Dubai, and growing expectations that Abu Dhabi, the lead state in the UAE and the wealthiest, will come of Dubai's aid.

That was obviously the message the Abu Dhabi government wanted to project over the weekend with stories appearing in business media in Europe, the US and on news agencies.

Reuters reported yesterday that Abu Dhabi will "pick and choose" how to assist debt-laden neighbor Dubai, according to as senior official.

"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone.

"Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors who for years assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor.

"Some of Dubai's entities are commercial, semi-government ones. Abu Dhabi will pick and choose when and where to assist," said the official, who declined to be identified because he is not authorized to speak to the media."

There were similar statements to Dow Jones.

Abu Dhabi has 90% of the oil that make the United Arab Emirates the world's third-largest oil exporter.

It has already provided $US15 billion in indirect support for Dubai through the UAE central bank (in February) and two private Abu Dhabi banks (last Wednesday).

Reuters said that how much more support the Emirate provides for its cash-strapped neighbor, however, will depend on how Dubai clarifies its stand on unresolved issues.

"Until things become clearer, it is very difficult to make any further investment decision on the bonds. Many things have to be clarified by Dubai," the official said.

The UAE central bank told newsagencies that it is closely watching events in Dubai.

"The central bank is monitoring developments very carefully to ensure that there is no negative impact on the UAE economy," the spokesman told Reuters by phone."

That seems pretty clear cut, and might help explain why $US5 billion lent by two banks in Abu Dhabi on Wednesday (two hours before the standstill statement), to the Dubai government, isn't being used to prop up Dubai World or repay the Nakheel Islamic bond.

By the numbers, the problems in Dubai should not shake world banking for much longer.

According to data from the Bank for International Settlements, foreign banks have $US130 billion of exposure to the United Arab Emirates, with Britain having the largest exposure, $US51 billion.

Banks in the United States have debts of $US13 billion.

That is just 0.4% of foreign banks' total cross-border exposure, according to London analysts.

Of that $US130 billion, some $US80 billion to $US90 billion is held by Dubai.

Dubai World's largest creditors are domestic banks in Dubai and Abu Dhabi.

But some UK banks still have large exposures in dollars.

The UK government controlled Royal Bank of Scotland is reported to be one of the largest lenders to Dubai World, having secured $US2.3 billion worth of loans to it since early 2007.

Standard Chartered and Barclays have large US dollar loans to the UAE and to Dubai. HSBC has a reported $US17 billion exposure to the UAE.

But it should be pointed out that Abu Dhabi is oil and asset rich, Dubai is oil short and a spendthrift in comparison.

Still, that doesn't mean there isn't reason to be nervous.

Confidence in banks remains fragile, with confidence in banks with loans to unsteady countries,such as Dubai, Greece, Eastern Europe, the Baltic States and several other regions, even more fragile.

India, which receives and estimated 10-12% of its global worker remittances from the UAE, says it is watching the situation closely, but doesn't expect any problems.

Bangladesh and the Philippines also have tens of thousands of workers in the region.

Property remains the biggest concern, partly because of the emergence of Nakheel as a dodgy borrower, but also because local property values have plunged, especially on high priced apartments, villas and homes that were bought by foreigners in the region and overseas.

The continuing worry outside the region is that the fears of a possible debt default at a Dubai state-owned conglomerate could be the catalyst for a correction in equities and risk assets, especially in some emerging markets.

That's why markets will remain jumpy, especially if the statement expected from the Dubai government doesn't explain the situation more clearly and offer more guidance as to what is to happen to debt repayments and the Islamic bond due next month.

If there's more confusion, markets will sell off again.

Some in the markets have pointed to the fact that Dubai is not the only country carrying high levels of domestic and foreign debt.

Besides the usual suspects (Greece, etc), some analysts have pointed out that the US and UK are in the same position.

Some argue that Japan is as well, but it has huge domestically held debts and over $US1 trillion of foreign reserves.

There is a danger that Dubai's woes will force markets to again focus on debt levels in a number of major economies.

Australia also has a large international debt, but we have prospects, unlike Dubai, the UK, Greece and the US..