After weeks of feeling like the international presses doormat, Dubai Inc finally caught a bit of a break as it would appear that big brother (he of 8.5% of the world’s oil reserves) has decided to step in and shoulder some of the debt burden. The news, coming on the heels of a week’s worth of speculation in the local equity markets, is that the UAE Central Bank will be subscribing to $10billion worth of a $20billion dollar bond issuance by the Government of Dubai. This puts Dubai Inc in the unique category of first globally bailed out Emirate.
So, what are the ramifications of this? Seeing as we’ve been living in a world of speculation for the past two months, it’s nice to finally get some tangible news to analyze.
From a Dubai Inc debt perspective the news is extremely positive. Dubai Inc has about $80billion in mostly short-term debt outstanding. $15 billion is roughly due to mature this year. Now, while 80+20 does equal 100, Dubai’s big problem is short-term liquidity. To quote Irving Fisher, “Debts due at once are more embarrassing than debts due years hence, and those payable at the option of the creditor, than those payable at the convenience of the debtor. Thus debt embarrassment is great for call loans and for early maturities.” Thus, if we were to analyze this news within the context of Dubai’s total debt embarrassment; we could conclude that Dubai has drastically improved its ability to meet its near term obligations (that 4% coupon looks very generous if you look at Dubai CDS spreads). Will some difficult decisions need to be made down the road? Of course, but now Dubai has secured some flexibility to ride out the storm.
The equity story is a little different, but should be all too familiar for those following the global economic crisis. Dubai’s debt obligations continue to leave little room for shareholders chasing corporate profits. It is unlikely that this money will be used by the government to purchase preferred stock or even dilutive stakes in corporate entities. I also think it is unlikely that this money can address the root problem of incredible overcapacity in a real estate driven economy. Dubai has built it, and the will come, but odds are “they” won’t get here fast enough to save private capital that was betrayed by hopelessly unproductive works. Banks, facing on oncoming tsunami of non-performing assets, will continue to be reluctant to lend to the real estate sector. Why? The answer is quite simple. Banks, like everyone else in the world continue to expect unemployment to rise and asset prices to fall. Moreover, when you expect to continue to pay for past mistakes, you try very hard to avoid making new ones. Sadly, shaking a deflationary bug is just not something that equity markets do very well.
I believe the Dubai Government will be very selective when it comes to allocating this money. I presume that they will focus on streamlining operations, infrastructure projects, and debt obligations tied to “key” strategic assets. Basically, they will continue to focus on restructuring and positioning themselves for the long haul.
That being said, a little good news can go a long way, coiled springs like to pop, and dead cats do bounce. Trade accordingly.