Where are the oil-rich Gulf states? That has been a recurring reaction in international markets since Dubai delivered its shock call for a standstill on the debts of its flagship Dubai World.

With hundreds of billions of dollars accumulated by Gulf governments
over the recent oil-boom years, international officials say that surely
someone can extricate Dubai from its financial troubles.

Throughout the dark days of the financial crisis, many analysts had
played down worries about the Gulf, including heavily indebted Dubai,
assuming there was simply too much money sloshing around for any
big-name company to default on its debt. Gulf sovereign wealth funds,
after all, were being courted by western officials to help rescue
troubled international banks.

Liquidity crises and defaults are not unheard of in the region but they
are most often dealt with discreetly, with conservative states
preferring not to air their dirty laundry in public.

It is believed that Abu Dhabi extended a loan to Saudi Arabia in 1998
to save the kingdom from a liquidity crisis. Last year, when
Bahrain-based Gulf International Bank, which is owned by six Arab Gulf
governments, was struggling with its exposure to distressed assets,
Riyadh is said to have quietly stepped in to buy up most of the
ownership. “They could have dealt with Dubai World in the usual
discreet channels,” says a frustrated analyst.

Over the past year governments have intervened robustly to protect
markets, particularly in Qatar and Kuwait, from the impact of the
financial crisis. In some cases, though, Saad Groupthere have been
indications that the private sector should not expect a blank cheque.

Some western observers have suggested that the Gulf Co-operation
Council – the institution that groups Saudi Arabia, the United Arab
Emirates, Bahrain, Oman, Kuwait and Qatar – should be stepping up as a
group to help Dubai. But that is unrealistic; the GCC is not a tool for
emergency or joint action. The group might be working towards economic
integration and monetary union but its progress has been stymied by
political rivalries and concerns over national pride.

Within the UAE federation, Dubai has been a fiercely independent
member, moving at a super-charged economic pace that had made its more
conservative neighbours, within the federation and beyond, uneasy.
Indeed, one can expect a certain amount of glee today in Gulf capitals,
even though their own economies have been hurt by Dubai’s woes.

One senior Gulf official tells me that at no point over the past year
had Dubai turned to neighbouring states for financial assistance. It
has also been reluctant to be bailed out directly by Abu Dhabi ,
preferring the assistance to come through the federal government of the
UAE.

Today, while everyone is looking to the Gulf, much of the Gulf is
looking to Abu Dhabi to resolve the Dubai World crisis. It has long
been assumed that the most endowed emirate in the UAE would always back
other members in the federation.

Abu Dhabi, however, is caught in a trap. Though fearful of Dubai
World’s impact on the UAE economy and the reputation of UAE
corporations that are increasingly encouraged to raise funds on
international markets, Abu Dhabi has insisted it will not be rushed
into action and that any move has to be channelled through the federal
government.

People familiar with the thinking in government circles say that no one
knows yet the full scale of Dubai World’s problems. Only through the
company restructuring announced last week can a plan be worked out to
address the debt problems.

Some analysts also point out that, if it were to guarantee Dubai
World’s debt, Abu Dhabi could open itself up to a host of other
demands. “What about contractors in Dubai who have not been paid and
what about infrastructure projects that still have to be completed?”
says one analyst from a neighbouring Gulf state.

Until the UAE sorts out Dubai World, Abu Dhabi – and much of the rest
of the region – will try to limit the tremors unleashed by the crisis
and hope that investors will not confuse Dubai with the generally
healthier state of other Gulf economies.

Source: Financial Times

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