Dubai has financial problems, central banks are easing tensions

Dubai - The impacts of the financial problems facing the emirate of Dubai intensified over the weekend. The central bank of the United Arab Emirates (UAE), which includes Dubai, has implemented extraordinary measures in an effort to calm investors and small depositors and has opened a credit line for all commercial banks operating in the UAE. However, the risk of a state bankruptcy is far from averted. Problems may also manifest in Germany and other countries that were involved in the local projects.
    Dubai informed about the problems just before the start of a longer holiday period, so the local markets had no opportunity to react to the announcement. It is therefore expected that when the exchanges open on Monday, they will face a massive decline, likely reaching the maximum allowed limit. According to analysts, banks, construction companies, and real estate firms will suffer the greatest losses.
    A slight shift in the crisis occurred on Saturday when a representative of the emirate of Abu Dhabi stated, according to Reuters, that the emirate would help Dubai. However, it does not mean that it will take on all of Dubai's obligations. On the contrary, it will choose on a case-by-case basis. This announcement did not calm investors, and their concerns were not lessened even by the central bank. "The market could be slightly supported by this, but I think it won’t be enough," said Shafqut Raslan, head of the brokerage firm Prime Emirates, regarding the central bank's measures.
    The problems facing Dubai escalated on Wednesday. The emirate announced that two key state companies, Dubai World and Nakheel, want to negotiate with banks to postpone debt repayments. The companies have obligations totaling $59 billion (about 1.04 trillion CZK), which is also a significant part of the emirate's total debt of about $80 billion.
    The finances of the emirate of Dubai and state companies are significantly interconnected, and investors are concerned that the situation could escalate into a state bankruptcy. For this reason, global stock markets weakened significantly on Thursday, although some of them erased losses and began to rise again on Friday.
    Dubai's development has largely been financed by banks from the Middle East, a large portion of which are from Abu Dhabi. Bankers from Abu Dhabi stated that at least 30 percent of the loans their banks provided were for companies in Dubai. Therefore, investors are not so much worried about whether Abu Dhabi will help Dubai, but when and in what form they will do so.
    The British newspaper Independent on Sunday reported that the banks which lent a total of more than $30 billion (over 526 billion CZK) to the Dubai World conglomerate are likely to ask the consulting firm KPMG to represent them. They want most of the money they provided back. Among the financial institutions that are likely to turn to KPMG is the largest British bank HSBC, as well as the Royal Bank of Scotland, Lloyds Banking Group, and Standard Chartered. The paper did not name its source of information and KPMG declined to comment on the report.
    Dubai has transformed in a very short time from a backward desert settlement into a modern financial center of the Middle East. Instead of sand, the local skyline is now lined with skyscrapers, and Dubai is home to the tallest building in the world - Burj Dubai. It is expected to open next year in January, approximately a year late.
    Many large development projects in Dubai have been carried out by Nakheel, which is part of the Dubai World conglomerate. They are behind the construction of artificial islands shaped like palm trees, which characterize Dubai in the eyes of people around the world and were created during the height of Dubai's expansion. However, many foreign companies, including a significant number from Germany, also contributed to the development of Dubai.