DUBAI — The United Arab Emirates’ central bank set up an emergency facility yesterday to support bank liquidity in the first policy response to Dubai’s debt woes that threatened to paralyse lending and derail economic recovery.
Dubai rocked the financial world on Wednesday when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to a six-month freeze on billions of dollars of debt as a first step to restructuring.
Dubai World had 59bn of liabilities in August, a large proportion of Dubai’s total debt of 80bn. The market widely expected repayment of 3,5bn in Nakheel’s Islamic bonds, due to mature on December 14.
The central bank policy move came late yesterday as Dubai’s supreme fiscal committee gathered to prepare a statement before markets open today in an attempt to reassure investors.
The central bank said the banking system was more sound and liquid than a year ago, when the global crisis ended the oil and real estate-fuelled boom in the Arab Gulf.
Stocks from Tokyo to New York have been haunted by concern that banks are exposed to state companies in Dubai, though world leaders expressed confidence in the global economic recovery on Friday despite the fears. There are also fears that if Dubai defaults on debt repayments, it could start a wave of defaults in the region.
Standard and Poor’s downgraded many government-related companies recently, noting that the request to freeze the debt payments could be considered as defaulting on its obligations.
Analysts said the central bank’s move was a preventive measure to avert capital flight and a run on deposits when markets reopened today after a four-day holiday.
“It is important because the main concern is that there might be some panic behaviour by depositors in Dubai and by bankers who want to take deposits out of the banking system,” said economist John Sfakianakis in Riyadh, Saudi Arabia.
Senior bankers in Abu Dhabi, Dubai’s oil-rich cousin in the UAE federation, said on Friday Abu Dhabi banks had built up exposure to Dubai-based companies of at least 30% of their loan books.
Today sees the first test of a Dubai World unit (the Jebel Ali Free Zone Authority), which faces a payment on a 2bn bond, issued in 2007. The coupon is estimated at about 40m.
Wednesday’s moratorium request spread more shadows. Investors and analysts have complained Dubai World was not transparent enough.
Nakheel is considering ways to pay back a 4bn obligation due soon. It is considered a crucial payment, which, if met, could give breathing room to restructure.
Four options were on the table, the National newspaper reported. The most drastic would see Dubai World liquidate its extensive assets, and other options could see partial repayment offers.
Dubai’s government says it has limited liability for Dubai World, a government-related entity whose debt was not sovereign backed.
Another newspaper, Independent on Sunday, said yesterday banks that lent Dubai World more than 30bn planned to appoint auditors KPMG to represent them in talks to recover their money. They included HSBC, Royal Bank of Scotland, Lloyds Banking Group and Standard Chartered.
Goldman Sachs said HSBC and Standard Chartered could have the most exposure to Dubai debt, but potential credit losses appeared relatively small. The deeper risks could hit Emirates banks and investment firms.
KPMG will be appointed once creditor banks have created a steering committee of main lenders. No KPMG comment was available. Dubai World has refused to offload assets at fire-sale prices to repay obligations, forcing it to seek a debt standstill.
“The group absolutely refused in the last few months to sell a number of good investment and property assets at low prices,” al-Ittihad newspaper said, quoting a source at Dubai World .
The KPMG restructuring is expected to focus on property and foreign investments, which have been the worst hit by the economic crisis, according to the source.
“Asset sales should be commercially fair to meet the group’s long-term strategic goals beyond the immediate economic pressures,” the source said.
Meanwhile, the rand fell against the dollar for a second day on Friday, and markets roiled as Dubai’s proposal to delay debt payments continued to erode investor confidence in emerging markets. The rand depreciated as much as 2,1%, to R7,64 to the dollar, after dropping 2,2% on Thursday before strengthening by as much as 1,3% against the greenback by Friday night.
Stocks and commodities dropped around the globe after Dubai World sought to reschedule its debt.
Moody’s Investors Service and Standard & Poor’s said they might consider the plans to delay repayments as a default.
The price of gold fell as much as 2,8% to 1138/oz in London on Friday; oil fell as much as 2% to 73,70 a barrel, while platinum dropped as much as 2,1% to 1 453,10/oz.
The FTSE-JSE Africa all share index closed on Friday 0,8% weaker, the Nikkei index ended 3,2% lower, while China’s Hang Seng index fell a substantial 4,8%.
The South Korean stock market fell 4,7% to a four-month low.
Developed country markets were firmer, with London’s FTSE 100 closing 1,17% higher.
However, the S&P 500 and Dow Jones indices were trading 1,47% and 1,6% lower on Friday night. With Edward West, Sapa-AFP, Bloomberg and Reuters