With little official comment on Dubai's debt, analysts have been forced to speculate on its nature.
For transparency, you need to see the figures
In the days of the Soviet Union, there was a group of people known as Kremlinologists, of whom Condoleezza Rice was probably the most famous. Their job was to watch the events at the Kremlin, the seat of Moscow's government, and interpret them to a waiting world. The position the nation's elite - or nomenklatura - assumed when observing the arrival of a parade in Red Square was significant. So, too, was their absence in official portraits. The Kremlinologists were forced to live off scraps because there was no official comment from the Politburo. When the Soviet Union finally unravelled in spectacular fashion, the watchers had failed to observe the signs, so consumed were they by the minutiae.
In a similar fashion over the past few months, a group of analysts have formed with one purpose: to comment on the status of Dubai's debt. Let's call them "Dubaiologists". With little official comment, they have been forced to speculate on its nature. Even worse and potentially more destabilising for an economy, investors assumed the worst: recently the spread on credit default swaps for Dubai Holding's debt has reached 10.50 percentage points per year. As one Dubaiologist explained, this means that it now costs more than US$1 million (Dh3.67m) a year to insure against the possible default of $10m worth of Dubai Holding's debt.
This is absurdly high, but lack of information breeds this kind of uncertainty. Nobody suggests that the thriving free market of the UAE bears any resemblance to the collectivisation of the Soviet Union. It is just that they would like a bit more transparency, and to be able to rely on fact, not rumour. So it was with a sigh of relief that Dubaiologists greeted this week's comments by Mohammed Ali Alabbar, the chairman of Emaar and head of the special Dubai Executive Council formed to oversee its debt situation. "Let me therefore state categorically," he said. "The Government can and will meet its obligations going forward. Let there be no doubt about this fact... the total debt obligations of affiliated companies stand at $70 billion compared with assets valued at $260bn."
Many investors were relieved. The Dubai Financial Market even posted a gain that day, breaking a long downwards trend. In fact, the only people possibly worried by such a revelation were the Dubaiologists. Could this mean they would be out of a job? It was Morgan Stanley who first put their heads over the parapet in the summer and called the top of Dubai's property market. Their forecast that property prices would fall by 10 per cent by 2010 was widely vilified. The authorities rallied to condemn the report. But what the developers would give now for such a measured fall in prices; the reality may be much worse.
"International investors are capable of drawing their own conclusions if provided with data that are consistent and [available] on a regular basis," said George Makhoul, the president of Morgan Stanley's operations in the MENA region, at a panel hosted by DIFC Week. "In the absence of transparency, once we enter into crisis mode, effects are going to get exacerbated and there will be a loss of confidence - rumours will feed into vicious cycles."
While he said it was "refreshing" to hear official views of figures on government books from Mr Alabbar, Mr Makhoul asked: "Why couldn't we have had that information three months ago and in a consistent fashion?" Speaking at the same event, Sameer al Ansari, the chief executive of Dubai International Capital, said it was difficult to evaluate retail figures in the GCC, for example, because the numbers "don't exist".
There is no news on inflation, despite the Ministry of Economy promising in August to release the latest figures. Dubaiologists are already processing the information from Mr Alabbar, and developing a hunger for more. JP Morgan Chase put out a research note full of praise for Mr Alabbar's words, but with a caveat. "It is a welcome step, finally clarifying the debt position of Dubai, yet in our opinion, the real problem for Dubai-related entities is not the 'asset coverage' but 'cash flow coverage'."
Government authorities reading such a report must wonder what they can do to satisfy the demands of the Dubaiologists. Surely it is plain to everyone that Dubai has plenty of money to pay its creditors? Yesterday, it was announced that Dubai Holding Commercial Operations Group, the holding company of Dubai Holding's property, tourism, infrastructure and telecoms operations, repaid Dh2.4bn of eurobond and bank debt. How should we interpret this? Maybe it is just a case of a company repaying a loan, something that happens all the time. But should we be afraid to ask?
A Kremlinologist making too many assumptions risked the possibility of being sent to Siberia, if he ever set foot in the country. Such radical measures are unlikely here, but there are growing signs that Dubaiologists who ask too many questions, or who draw unnecessary conclusions, risk being sent into the cold. When Citibank issued a report on Dubai on Nov 17, its author did not pull any punches, but nor was he incendiary. "As the global oil surplus shrinks, Dubai is the most vulnerable, as it has thrived on regional surpluses. Real estate and debt refinancing are real risks, but we believe Dubai will pull through with some help," he wrote in the executive summary.
Eight days later, Citigroup sent out a statement distancing itself from Mushtaq Khan's measured and informative report. "With regards to Citi Investment Research reports, including the latest special report titled: 'Managing domestic and global expectations/The policy challenges facing the GCC', Citi management would like to state that all the views expressed in these reports do not necessarily reflect the views of Citi as a company. Furthermore, these views accurately reflect the personal views of the relevant authors about any and all of the subject securities, issuers, currencies, commodities, futures, options, economies or strategies."
In other words, you are on your own, mate. But muzzling the messenger is not the answer. Few doubt that Dubai - and the country as a whole - will emerge from the global slowdown and financial turmoil. House prices will probably go down. Debt may need to be refinanced on less generous terms. That is what happens. Concerns about Dubai's debt are overdone, says the head of the Dubai International Financial Center.
"Ratings agencies say Dubai lacks the financial muscle to cover debt. Dubai is not just built on credit; in the past it's largely been equity financing rather than debt," said David Eldon, the chairman of the DIFC Authority. "The reality is that Dubai is not alone, it has the backing of the UAE, particularly Abu Dhabi, which happens to have the world's largest sovereign wealth fund, as well as vast oil reserves."
However, such a guarantee is implicit, rather than explicit. How should we interpret his comments? If Abu Dhabi is willing to assume Dubai's debts, shouldn't it just come out and say so? Nor is it helpful to hoard economic data. That just breeds uncertainty and fear, and no investor can cope with either of those emotions. "You can't manage without the information and statistics, whether for government [affiliated entities], private [companies] or a corner shop," said Mr Ansari. "This is an issue in this part of the world... that we need to tackle; [to have] timely, accurate dissemination of information."
Otherwise Dubaiologists, like their former counterparts the Kremlinologists, risk being unable to interpret correctly the story because they are left considering crumbs - and miss out altogether on the cake. * additional reporting by Sara Hamdan and Travis Pantin firstname.lastname@example.org