Financial Fire Fighting
The disastrous results from RBS illustrate how challenging it is to mark the bottom of the market. Between the write down of the pricey purchase of ABN Amro and marking down toxic assets, the once highly successful bank tallied up a record loss of $34 billion. That is a sea of red ink which is forcing the British government to up its stake to nearly 80 percent.
I used the RBS example because everyone in government and business alike is trying to douse the flames of financial turmoil. The most dramatic example of this approach in the Middle East came from the United Arab Emirates -- which in the spirit of the term “united” took federal action to support Brand Dubai by taking 50 percent of a $20 billion bond offering.
A few days later, we heard from Nasser Al Shaikh, Director General of Dubai’s Department of Finance, who said that the government was looking at a possible stimulus plan over the next few weeks to jump start small and medium size enterprises. “The times are challenging throughout the world. Now it is up to us,” he declared at a news conference.
The re-defining of “us” in the context of the UAE is what the $10 billion bond purchase is all about. The UAE central bank pumped more than $30 billion into the banking system during the fourth quarter of 2008, but that money was not earmarked for Dubai. This latest round was.
The strategy changed back in mid-November at the top levels of government. During an interview on Marketplace Middle East back then, the Speaker of the House of the Federal National Council, Abdul Aziz Al Ghurair pointed in that direction.
“The UAE has over $600 billion in foreign currency reserves and sovereign fund investment abroad. Now, this money will have to be put into use,” said Al Ghurair. “So I think the commitment is there to support the economy of the entire country.”
Al Ghurair, who is also CEO of MashreqBank, had a message to those who were not managing their bottom line, “If the cash flow is there, and if the track record is there, people will still lend you money.”
That will mark the biggest shift going forward, the effort to evaluate companies on their merits and future growth. As one well-known banker noted over coffee this past week, “Dubai cannot fail.” He believes that it would be a defeat not only for Brand Dubai but for the entire UAE. He, by the way, is putting money behind his words, seeing the near completed infrastructure of the emirate and the financial services sector as key reasons to go into the market now.
Another leading financier who also preferred not to be named said the support from the UAE Central Bank sent the right message. This is “not a charity.” The $10 billion purchase was done on commercial terms of 4 percent a year. It was being viewed as a lot of money (about one-fifth Dubai’s GDP) but “not too much money.”
In fact, Dubai finance officials say there is no rush to go to the market to raise the other half of the funds. With no strings attached, the government can allocate funds where needed in the short-term. At the same time, bankers say this will reduce the risk premium on future borrowing this autumn when additional payments come due.
Florence Eid of London-based Passport Capital was in Dubai when the new strategy was announced. “It is certain that the vote of confidence through the bailout package, the debt package is a very strong vote,” noted the economist. “But there is going to be a lag between this and the real economy.”
Eid is referring to the 25 percent drop in real estate prices already on the books. The head of the Dubai Real Estate Authority said that rents could drop by 40 percent by the end of 2009. Eid also noted that we should wait to see what happens at the end of the school year. If expatriates vote with their feet and leave, that will undermine the real economy.
Brand Dubai has been built on confidence and a dream. This applies to financial services, the airline sector, the giant Jebel Ali airport and most importantly the property market. Step by step UAE finance officials are trying to put fires out by providing liquidity to the federal system and so far to one key emirate. Everyone is keen to see if there will be future flare ups as the region and the globe attempt to navigate extremely rugged terrain.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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