Monday, Nov 30, 2009

 
  
   By Tim Falconer  
   A DOW JONES NEWSWIRES COLUMN  
 

DUBAI (Dow Jones)--A week is a long time in financial markets.

It feels even longer in Dubai.

Just seven days ago this city state was tending the green shoots of a nascent property recovery. Its bourse was the second-best performer in the Gulf region this year and the whisper in the corridors of the Dubai International Financial Center was that NakheelNakheel, the developer that borrowed billions to build grandiose projects such as Palm Islands, was in a position to deal with a $3.52 billion Islamic bond, or sukuk, due next month.

What investors and markets didn't count on was the chilling message delivered by Dubai last Wednesday. Just hours before a four-day religious holiday, Dubai said its flagship Dubai WorldDubai World holding company was to undertake a massive restructuring and was seeking a standstill on all debt, including the NakheelNakheel sukuk.

In terms of news management this mess couldn't have been handled any worse by Dubai Inc. Until last week investors were lead to believe Dubai was slowly but surely dealing with its financial responsibilities.

One local fund manager, already upset with the Eid holiday disruption, fumed to this writer that winning back the trust of investors will be a long battle, "especially in light of recent announcements that Dubai was solvent."

The emirate's carefully crafted reputation as a burgeoning international business center and regional leader in finance now appears as shifty as the sand the city was built on. International investors are an unforgiving bunch and the damage that even the threat of default has done to Dubai's investment appeal will take some fixing.

The big problem for local markets now is one of confidence. Investors will ultimately question the merits of recent equity market gains and ponder the possibility of the economy nose-diving again.

To be fair, the United Arab Emirates' central bank said it provided an additional liquidity facility to local and international banks in the U.A.E. and stressed that it "stands behind" the lenders. But, even with this in place, banks will likely still turn more cautious and, with credit becoming scarce, there will be tough months ahead for Dubai's struggling real-estate sector.

Ultimately the magnitude of the fallout for Dubai will hinge on just how generous its cousins down the road in oil-rich Abu Dhabi are feeling. They've already stumped up $10 billion, albeit under the guise of the central bank, and banks there bought $5 billion in Dubai bonds last week.

But, while Abu Dhabi might be quicker to forgive, international investors will take much longer to get over Dubai's latest debt debacle.

(Tim Falconer is Dow Jones Newswires' Middle East News Editor, based in Dubai. He has been a financial news reporter since 1999 and has reported on equity, money and commodity markets for Dow Jones Newswires in Wellington and London as well as Dubai. He can be reached at +971 04 364 4968 or by email: tim.falconer@dowjones.com)

TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackEurope@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.

(END) Dow Jones Newswires

30-11-09 0828GMT