With missed loan payment, Dubai's golden aura dims

By Howard Schneider
Washington Post Staff Writer
Monday, December 14, 2009

DUBAI, UNITED ARAB EMIRATES -- The leaders of Dubai have been accustomed to an easy ride when it comes to raising money, with bank and bond investors around the world willing to pump tens of billions of dollars into increasingly grandiose projects on the premise that, if anything went bad, the emirate and its oil-rich neighbor, Abu Dhabi, would stand behind the debt.

That era of easy money -- and a presumed government guarantee -- has been grinding to a halt for months now and officially ends on Monday, when the government of Dubai has said that one of its main government-owned companies will skip a scheduled $4 billion bond payment.

Although a negotiated agreement is still possible, analysts say that the uncertainty raised by Dubai's recent actions -- the government said last month that it was suspending payments for six months on a total of $26 billion owed by government-owned companies -- could put projects at risk throughout the region, bring closer scrutiny from banks and investors, and raise borrowing costs.

Dubai "could well be the tip of the iceberg in terms of over-leveraged nations," analysts at India's HDFC Bank wrote in a report, as indicated by recent fears about a possible Greek default.

Monday's scheduled bond payment by Nakheel PJSC -- and the possibility of a default -- is the opening wedge of what could be a precedent-setting fight with foreign investors over the methods used to finance Dubai's breakneck development.

"We are in completely uncharted territory" that could redefine the relationship between Western investors and the government-backed companies often set up to develop projects here and in other emerging markets, said Chavan Bhogaita, head of credit research at the National Bank of Abu Dhabi.

The superlatives have run thick around Dubai for more than a decade as the ruling Maktoum clan helped unleash plans for the world's tallest skyscraper, the world's largest beachfront development, and a series of other grand and glitzy projects.

What that wrought over the past year is a more ignominious event: the world's biggest real estate crash. Housing prices have fallen nearly 50 percent so far this year, putting Dubai below Estonia for the biggest decline, according to a recent report by the London-based Knight Frank real estate group.

The bond due on Monday was issued to help finance Nakheel's Dubai Waterfront development, a massive effort to fashion "empty desert and sea" into a city of 1.5 million people. The project is now stalled in its initial phases because of the real estate collapse.

A brief panic ensued after officials announced last month that Dubai would suspend payment on $26 billion owed by Nakheel and other ailing government-owned companies, a reminder to markets of the excesses still to be worked out of the global financial system.

When the debt standstill was first announced, some analysts saw it as a difficult new stressor on banks, particularly British firms that lent to or invested heavily in Dubai; others conjectured that Dubai was the leading edge of a new crisis, this one among overextended governments.

But "such fears say more about the still-fragile nature of global financial markets than about the contagion potential of Dubai, which is limited," Eckard Woertz, program manager in economics at the Gulf Research Center, wrote in a recent analysis.

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