DUBAI – Abu Dhabi on Monday bailed out Dubai with $10 billion in a surprise move that showed global investors the oil-rich neighbour’s support for debt-laden Dubai was strong, sending battered stock markets to their highest levels in a year on renewed confidence.
The money prevented Nakheel, developer of Dubai’s palm-shaped islands, from defaulting on an Islamic bond due on Monday. Nakheel is part of government-owned conglomerate Dubai World that shocked investors in late November when it asked for an extension to repay its debt.
Analysts said Abu Dhabi’s help, while unexpected, would boost confidence in Dubai and the region. But the initial rebound will not help in the long-term as Dubai grapples with a debt estimated to be between $80 billion and $150 billion.
“There should be an initial rebound but the longer term outlook doesn’t necessarily change things,” said Fahd Iqbal, a strategist for the Gulf region at EFG-Hermes.
About $4.1 billion of the money will be used to repay the bond of Nakheel. The rest will be used to finance Dubai World’s needs until the end of April.
“The government of Dubai is particularly focused on addressing the concerns of Dubai World trade creditors within the emirate of Dubai,” Sheikh Ahmad bin Saeed al-Maktoum, chairman of the Dubai’s Supreme Fiscal Committee, said in a statement.
“To help address these concerns, today the Government of Dubai is announcing that the remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors. Discussions with affected contractors will begin in short order.”
He added: “Next, the Central Bank is also prepared to provide support to local UAE banks.”
Dubai shocked world markets on Nov 25 when it asked for a standstill on $26 billion of debt repayments by conglomerate Dubai World.
Investors were concerned about repayment of Nakheel’s bond, seen as test for Dubai’s ability to pay the hundreds of billions of dollars it has accumulated in debt in the past several years as it became a hub for tourism, logistics and financial services in the Middle East.
Nakheel said on Monday on a statement on Nasdaq Dubai that it would repay the bond in the next two weeks.
The Dubai Financial Market’s main index was up more than 10 percent on Monday morning. As of Sunday’s close it had lost about a fifth of its value since Dubai World requested the debt standstill. Abu Dhabi’s main index was up 7.2 percent.
“Overall this is good news, a huge confidence booster to Dubai. But it is also a reminder that clearly Dubai does not possess the money and it is Abu Dhabi that does,” John Sfakianakis, chief economist of Banque Saudi Fransi-Credit Agricole, told Maktoob Business.
“We need so see how the restructuring is done and what happens with other entities not just Dubai World,” he said, adding that the uncertainty over Dubai’s liquidity situation is not over.
Dubai last month said it had secured $5 billion through a bond and sukuk fully subscribed by two banks linked to the government of Abu Dhabi. The money was part of a $20 billion sovereign bond programme Dubai launched in February to help its struggling state-related entities.
The UAE Central Bank fully subscribed to the first $10 billion tranche earlier this year.
While Dubai has reiterated that there is private sector interest in its bond programme, analysts and economists say private investors would not be interested.