Dubai's top finance official insisted on Monday that the restructuring of Dubai World's debt, although unpopular with creditors in the short term, was "a wise decision" in the interest of all parties in the long run. In a robust response to international concerns, Abdulrahman al Saleh, the director general of the Department of Finance, emphasised that the Dubai World debt was not guaranteed by the Government of Dubai and played down the likelihood of banks needing financial assistance from the Central Bank.
In an interview on Dubai TV, Mr al Saleh said: "The company [Dubai World] received financing based on its project schedule, not a government guarantee. The lenders should be part of the responsibility. I think banks are not at a stage where they need any extra liquidity from the central bank." The worldwide sell-offs of shares and negative commentary about Dubai's decision unfairly exaggerated the situation, Mr al Saleh said.
Mr al Saleh's statement was the clearest message yet about how Dubai viewed the debt troubles of Dubai World, the ports and property conglomerate. His comments came as investors waited for more details on the Dubai Financial Support Fund's original announcement last week that it had taken over the restructuring of Dubai World and would ask creditors to "standstill" and extend debts until the end of May next year.
Mr al Saleh said: "The restructuring is a wise decision that is in the interest of all parties in the long term but might bother creditors in the short term. They [international investors] think Dubai World is part of the Government, which is not correct. The Government is the owner of the company, but since its foundation it was established that the company is not guaranteed by the Government. "It deals with all parties on this basis and it borrows based on its projects and not the guarantee of the Government."
The International Monetary Fund (IMF) said it was watching how the Dubai Government would restructure Dubai World and deal with debt coming due. An IMF spokesman said: "We are continuing to monitor the situation following the announcement by the Government of Dubai regarding a standstill on the debt of Dubai World and its Nakheel subsidiary, which has had an adverse impact on financial markets," The IMF welcomed the UAE Central Bank's decision to open an emergency lending facility for banks.
"The United Arab Emirates is a strong resource-based economy and we welcome the announcement by the Central Bank of the UAE making available to banks a special additional liquidity facility," the fund said. "We look forward to further clarification by the authorities towards a co-operative mechanism to address the issues between these debtors and their creditors." On Sunday, the Central Bank pledged to support local banks and international banks with branches in the country. It said it would extend a special borrowing facility to them to ensure that there was enough liquidity in the markets as the Dubai and Abu Dhabi stock markets saw heavy selling yesterday.
After four non-trading days over the Eid holiday, the Dubai and Abu Dhabi markets were 7.3 per cent and 8.3 per cent down respectively on Monday. Global markets were more positive, with London marginally lower and New York ahead in early trading. The key question investors have is what exactly Dubai plans to do about billions of dollars of debt coming due over the next four months. Ian Munro, the head of research at MAC Capital, said: ""The market needs to see more clarity from these announcements. We need to know what is their strategy for turning the business around."
The first major test comes in just over two weeks, when Nakheel is supposed to repay a US$3.52bn (Dh13bn) Islamic bond. Repayment on schedule is one of four alternatives being considered by Aidan Birkett of Deloitte, who was appointed the chief restructuring officer of Dubai World, according to government advisers. Moody's, the international credit ratings agency, said yesterday that the restructuring of Dubai World was unlikely to affect the sovereign credit rating of the UAE or Abu Dhabi. "The adverse impact of a Dubai World restructuring on the non-hydrocarbon sectors of the domestic economy could potentially be severe, especially in Dubai," said Tristan Cooper, of Moody's, in Dubai. "However, overall macro-economic stability is protected by the country's strong net external creditor position that is bolstered by Abu Dhabi's accumulated oil wealth."