Even in Abu Dhabi, US$10 billion (Dh36.73bn) is a lot of cash. With some of the world's largest oil reserves, accumulated assets worth at least double its economy and one of the world's largest sovereign wealth funds, Abu Dhabi unquestionably has the money needed to help Dubai service its debts.
In theory, it could at a stroke pay off the entire estimated $85bn that Dubai and the companies it controls owe. But even the wealthiest investors can sometimes find themselves shy of cash if a sudden expense pops up when their funds are committed. Abu Dhabi's move to offer a much-needed injection of capital to Dubai has therefore raised questions about just how Abu Dhabi will convert some of its vast wealth into quick cash.
Some analysts have speculated that assistance to Dubai could be gobbling up Abu Dhabi's oil earnings, with some even attributing legal action this week by the Abu Dhabi Investment Authority (ADIA) to claw back its money-losing $7.5bn investment in the US bank Citigroup as a tactic to raise funds for Dubai. Analysts feel the concerns are misplaced. The rally this year in global financial markets and in oil prices have provided Abu Dhabi with a bumper crop of dollars, they say.
Abu Dhabi plans to buy $10bn in Dubai Government bonds. Officials have confirmed that the bonds will be on identical terms to the $10bn in bonds Dubai sold to the Central Bank in February, which pay interest of 4 per cent until they mature in 2014. Abu Dhabi's funds arrived in the nick of time for Dubai, where the Government-owned developer Nakheel had $3.52bn in bonds maturing on Monday. Nakheel has already reportedly received from Dubai the $4.1bn needed to pay off those bonds and has begun paying investors. The remaining $5.9bn from Abu Dhabi is needed to service other debts and pay contractors, and even more cash from Dubai's neighbour may be required, analysts say.
"The Dubai Government has now got over $30bn in debt, whereas a year ago it had virtually nothing," says Richard Fox, the head of Middle East and Africa sovereign ratings at Fitch Ratings in London. Dubai takes in revenues each year equal to only 11 per cent of its economy, Mr Fox estimates, so its debt-to-revenue ratio is nearing 400 per cent. "There aren't many governments with a ratio that high," he says.
While the money to pay off the Nakheel bonds is already moving, it is not clear whether any funds have yet changed hands between Abu Dhabi and Dubai. Concluding that Nakheel's bond was paid with Abu Dhabi's cash assumes that Dubai's own vault was empty. It is conceivable that while Dubai had the cash on hand, it had determined that it could not afford to spend it all on paying off Nakheel bondholders.
This is not the first time that analysts have wondered whether Abu Dhabi might be facing cash-flow issues. Questions first appeared this past spring, when the IMF was passing the hat around the Gulf and Abu Dhabi sold $3bn in bonds. Separate questions about whether the Central Bank had enough foreign currency reserves to help Dubai and its companies began surfacing in September. Abu Dhabi's decision to step in and buy Dubai's bonds directly help to allay such concerns.
Abu Dhabi is obviously good for the money. Fitch estimates that the emirate has accumulated assets at least twice the size of its GDP. But $10bn in cash is more than typically sits under the sofa cushions, even in Abu Dhabi. To combat the effects of the global economic crisis, Abu Dhabi's Government has already budgeted a deficit of Dh42.6bn for this year assuming oil prices at $50 a barrel. Oil has averaged $62 a barrel, which would close the gap somewhat but still leave Abu Dhabi with about $3.3bn of hole in its budget.
Abu Dhabi's bond sale helped to fill that gap and create a benchmark for its companies to borrow, but it does not appear to have left any spare change. That means Abu Dhabi would need to turn to ADIA or its newer sibling, the Abu Dhabi Investment Council (ADIC). ADIA serves as the Government's treasury, a rainy-day fund, and Abu Dhabi regularly dipped into it when oil revenues fell short. ADIC's purpose is purportedly the same.
Abu Dhabi's two big sovereign funds have at least $425bn in assets under management, says Rachel Ziemba, an economist at RGE Monitor who tracks sovereign wealth funds. "That implies quite a strong revaluation of the portfolio since February, when I estimated AUM [assets under management] was closer to $300bn," she says. Most of those funds are invested overseas in stocks and bonds. No one outside the funds knows exactly how much of their assets they keep in cash. ADIA has never disclosed its total size and a spokesman declined to comment for this article.
When ADIA last granted an interview in the middle of last year, it said it kept no more than 5 per cent of its assets in cash. Presumably ADIC is striving just as hard to maximise returns and maintains a similarly slim cash pile. That would, at current estimates, give Abu Dhabi about $21.3bn in cash to buy Dubai's bonds. ADIA, analysts say, maintains a liquidity fund for just this sort of occasion. While Abu Dhabi's announcement of aid to Dubai may have been a surprise to the rest of the world, ADIA was most probably alerted ahead of time, analysts said.
Once the cash is disbursed it would normally leave ADIA and ADIC risk managers with a new problem, however: an under-exposure to cash. But with oil prices now above $70 a barrel, analysts say ADIA is probably receiving more cash dividends from the Abu Dhabi National Oil Company to replenish its supply every day. When it comes to meeting Dubai's debt-servicing needs, ADIA and ADIC's pockets would therefore appear to be quite deep enough.