The murky Gulf

* username: rupertbu

Dubai is a creature of the latest wave of globalisation. It is a modern global transport, commercial and financial hub. Its attitude to transparency, however, is medieval. That is why markets have been baffled by Dubai’s recent problems. Investors do not know where to look to gauge the country’s troubles.

Restructuring talks between Dubai World, the government-owned conglomerate, and its creditors are at an early stage. No offers have yet been made regarding the new terms of the $22bn debt that is being renegotiated. But rumours suggesting that they will recover only one third of their money have rattled lenders to the emirate.

The cost of insuring $10m of Dubai’s government debt has risen steeply to $651,000. (Before the Dubai World restructuring, this figure was half that.) The price of Islamic bonds issued by the city-state continued their decline: they have lost 9 per cent of their value since January. The uncertainty of the Dubai World talks is contaminating the rest of Dubai – and no wonder.

In the statelet, as in the other members of the United Arab Emirates and in Saudi Arabia, the line between the public and the private is blurred. The state of Dubai, its ruler, his personal business interests and the investments of the state, have been conflated. It is also unclear how much debt the royal, statal, state-owned and parastatal institutions even have.

This opacity and ambiguity was constructive during the boom, but is now destructive. Dubai is to blame: it had only recently tried to define relationships between state-owned institutions and the state when this opacity threatened to land it with a large bill. Even now, investors are not sure which of the parts of Dubai Inc will be left holding which losses.

But there ought to be no concerns about the existing explicit debts of the state of Dubai itself. Creditors of state companies may lose out if the businesses they back do not perform. But the emirate will meet its commitments – not least because Abu Dhabi, the oil-rich capital of the UAE, would never permit a sovereign default.

A bail-out by its neighbour and rival would be painful for Dubai: in January, shortly after Abu Dhabi propped up its little sibling, the Burj Dubai – the tallest building in the world that towers over the city-state – was humiliatingly renamed the Burj Khalifa in honour of the ruler of Abu Dhabi. Dubai lives in the shadow of its deep-pocketed neighbour – but it benefits from the shelter.END