Report: Abu Dhabi

In recent weeks, the markets have wound themselves up into a frenzy of speculation that Abu Dhabi would not provide resources to assist Dubai
By None

The United Arab Emirates – The clue is in the nameby Francis Beddington, Head of Research, Insparo Asset Management

In recent weeks, the markets have wound themselves up into a frenzy of speculation that Abu Dhabi would not provide resources to assist Dubai with its heavy debt burden. This speculation started when Abu Dhabi organized a capital injection into five Abu Dhabi banks, but neglected to put money into any Dubai institutions.

This led to what we feel was a lot of highly ill-informed conjecture that Abu Dhabi would not stand behind Dubai, thereby forcing Dubai entities to default. The result of this was sharp sell-offs in a number of Dubai assets, with the Nakheel 09 bond falling by 20 points at one stage.

On the 23rd of February, Dubai announced a USD20 billion bond issue, the first USD10 billion of which was immediately subscribed to by the Central Bank of the UAE. This show of support led to sharp rallies in some assets, but throughout the GCC asset prices and CDS spreads have remained under pressure as speculation continues that, because it was a federal institution that provided support, Abu Dhabi has not explicitly decided to support Dubai.

It has always been our view that Abu Dhabi will stand behind Dubai. The United Arab Emirates is not merely a name, but is a statement of political and economic reality. The individual emirates will continue to function with a high degree of autonomy and may even be rivals in some senses; however the whole is greater than the sum of the parts. It is a mistake to view the UAE as a collection of sovereign nations like the European Union. In this context Abu Dhabis support of Dubai was and remains, in our opinion, inevitable:

Firstly, whilst Abu Dhabi and Dubai are separate Emirates the level of economic integration is very high, particularly in the banking and real estate sectors. This is demonstrated by the decision to move the issues regarding the troubled Dubai residential mortgage companies Tamweel and Amlak to a federal level. The collapse of Dubai would cause huge economic damage to Abu Dhabi and visa versa.

Secondly, a failure of Abu Dhabi to assist Dubai would in an all likelihood result in the collapse of the UAE as a political entity. As things stand, the President of the UAE is the ruler of Abu Dhabi. The Vice-President and Prime Minister is the ruler of Dubai. A conflict between the heads of the state would hugely undermine the political stability of the region. Further still, the collapse of the UAE would cause significant problems with the GCC, and would come at a time when greater economic and political integration, including the establishment of a single currency, is on the agenda. The other GCC states, including Saudi Arabia, would be actively opposed to a collapse of the UAE.

And finally, the collapse of the UAE would have serious geopolitical implications, especially for the US Government. General Peter Pace, the Head of the Joint Chiefs of Staff, has been quoted as saying the military to military relationship with the United Arab Emirates is superb. Equally, General Tommy Franks, when describing the relationship with the UAE, told the US Congress we have no greater ally in the Middle East in seeking a resolution of the problems in the Middle East.

Given the damage that the collapse of Dubai would do to Abu Dhabi and the UAE as a whole, which is not in the geopolitical interests of regional and global powers, we are supremely confident that Abu Dhabi would and will continue to support Dubai. Not every individual company in Dubai or Abu Dhabi will survive, but due to the support that each emirate can draw from its siblings, we can be sure that the UAE will.