The news has been full of the events in Dubai over the last 4 days, and its effects on the markets here in the states and abroad. I believe for several reasons which I will expand upon today is that Dubai World will be bailed out and the long term ramifications of this event will be less catastrophic than has been stated in the press. In fact I think it will be minimal and we have a buying opportunity in several sectors on the dip we experienced Friday.
The real focus should be on Abu Dhabi, where any bailout whether in the form of a broad sweeping infusion of capital, or a focused surgical approach, will come from. They are quite capable of either as they are extremely cash rich with an estimated $700 billion in reserves. The question lies in their willingness to aid their fellow emirate.
Abu Dhabi is ruled by His Highness Sheikh Tahnoon bin Zayed Al Nahyan [ Correction: The country is ruled by His Highness Sheikh Khalifa Bin Zayed Al Nahyan ] who is the son of one of the founders of the United Arab Emirates (UAE). This is also the case with the ruler of Dubai, Sheik Mohammed bin Rashid Al-Maktoum. Sheikh Zayed is a progreesive by the standards of the region and very dedicated to the business of Abu Dhabi and the UAE as a whole. Sheikh Tahnoon bin Zayed Al Nahyan holds the position of Chairman of the Royal Group which has substantial resources invested in the well being and financial soundness of Dubai. The business of Dubai World and the state of Dubai are so cosanguinal that they are for all intents and purposes the same entity. In the Royal Groups most recent newsletter you can see to what degree they are invested in Dubai, they hold real estate and business interests that would suffer tremendous losses were the situation to further degrade. While it is certain that they could sustain the losses without any real trouble economically one must consider other factors in predicting potential outcomes and assessing their probabilities.
First is the commitment on the part of the Sheikh to the very concept of the UAE. The UAE was formed by its founders to stop the perpetual conflicts between the various tribes of the area with the intent of forming an entity that would have power on the world stage. The wealth afforded them by the oil rich emirates has given them a powerful voice in world politics along with the Saudi’s and the other oil producers in the area. I believe the Sheikhs connection to the founder gives him a perspective that remembers the internecine conflicts of the region prior to unification. This perspective should weigh in favor of a bailout since a destitute and desperate Dubai would present an opportunity for unsavory and disruptive elements to regain a foothold in the area.
Second is the commitment to business in Dubai. As noted the November newletter of the Royal Group, an entity like Dubai World that cannot be separated from the Abu Dhabi ruling powers, they are not only heavily invested in Dubai but interested in it’s continuing success, or at least it’s survival as a venture. If the crisis is allowed to continue for any length of time foreign investment will inevitably pull out capital making for a larger bailout in the future. This will also result in a reduction of prestige for the UAE, The Royal Group, and in fact Sheikh Zayed himself.
Bonding the two together is the fact that the business hub of the UAE is Dubai, like it or not, and all the infrustructure for maintaining the UAE as a business hub for the region, and on the world stage in the future, is already in place there.
If this is the case why would the Sheikhs spokesperson make statements indicating a lack of commitment to a strong definitive response? The first answer is that it is a way to chastise Sheikh Mohammed. While the commitment to the UAE concept seems solid, historic rivalries die slowly and in this region slowly can mean extremely long times, and in fact generations. By taking a “hard Line” Sheikh Zayed establishes himself as the defacto leader of the UAE and increases his personal prestige on the world stage when the bailout occurs.
I believe all the above factors argue for the likelihood of a major bailout in the near term that will both keep the potential future of Dubai as a regional business powerhouse, and enhance the position of Abu Dhabi and Sheikh Zayed regionally and globally.
Disclaimer:
The Author and the Wallingford Trust have a business relationship with The Royal Group
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