Wednesday, August 5, 2009

Dubai Financial Support Fund : DUBAI RECOVERY ?

Launched in July 2009, the Support Fund “ is being established with the specific purpose of providing financial support and liquidity to Government and Government-Related Entities (GREs) undertaking projects of strategic importance within Dubai that contribute towards the overall economic development of the Emirate.”

“The Dubai Financial Support Fund will be responsible for managing the proceeds of the Dubai government's $20 billion bond programme and will provide loans on a commercial basis to Government and Government-Related Entities engaged in projects deemed to be of strategic and developmental importance to the Emirate of Dubai. Each application for support will be assessed against predetermined criteria to ensure the funds are allocated efficiently and in accordance with Dubai's long-term growth strategy.”

The emirate of Dubai has been hit hard by the financial downturn. The global downturn has slammed construction projects, with many under construction projects being cancelled or postponed, as cash strapped developers struggled to raise money in a frozen credit market.

Forays into Shipping & Ports and international investments by the emirate’s sovereign wealth funds also ran into rough waters as world stock markets started to slide, and GDP growth rates tanked.

The oil price crash last year also scared foreign investors away from Dubai debt (raising concerns of solvency at $35 Crude Oil), as it’s a well known fact that the emirate of Abu Dhabi holds the majority of the UAE’s oil reserves.


The U.A.E's Central bank took up the first tranche of a $20 billion bond issue in February this year. The emirate of Abu Dhabi could step in again if funding falls short! Let’s wait and see if investor sentiment has improved, as Dubai readies a second tranche bond issue.

Even as the level of risk aversion is receding (blame that on the green shoots!), investors are still concerned about new corporate and government debt issues.

Some cite issues regarding transparency. Which entities get the money? How does it get deployed? Is it going to be backed by the U.A.E. Government?

Still others remain wary of emerging market debt in general, especially from countries with high exposure to ‘bubble’ sectors like Real Estate (Dubai being a case in point).

Sky high valuations and excessive debt, raise concerns about the debt servicing ability of the borrower.

Another worrying factor is the overwhelmingly large percentage of investors (rather than genuine homeowners) in the Dubai Property market. We all know what happens when everyone tries to exit a market at the same time!

Lastly, if the global economic recovery is slower than expected or we were to have another down leg in the equity markets, how would Oil prices react?

How would the Dubai debt markets react to $35 Oil?

I end this post by highlighting a few points

  • I respect the view of the Dubai government, as it tried to diversify away from Crude Oil, given that its Crude Oil reserves are not the largest out there. This reflects realistic forward thinking and planning. Efforts to make Dubai a financial & trading hub could prove a masterstroke, given their strategic location between Asian and European time zones!
  • Long Term Investments require a long term investment horizon.I’m disappointed that many acquisitions have been debt funded and that too sometimes at high prices. Servicing this debt during the downturn can prove to be very stressful.
  • Real Estate Risk : Massive 'debt funded' construction projects could be saddled with large inventories if the recovery takes longer than expected, an outcome that is quite probable in an ‘investor’ driven property market.

Source Links:

U.A.E. Central Bank Steps In to Support Dubai Debt (Update1 ...

Sheikh Mohammed launches Dubai Financial Support Fund to sustain ...

ANALYSIS - Dubai's opaque $10 bln bond plan leaves investors wary ...

Saudi Gazette - Dubai launches Financial Support Fund to bolster ...

Full Coverage: IFB:- Dubai to borrow second $10bln

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