The Dubai Debt Crisis

Written By Brian Hicks

Posted November 30, 2009

Dubai spends like it’s got 90% of the oil in the United Arab Emirates.

Yet it only has 5%.

Abu Dhabi actually produces 9 out of every 10 barrels that comes out of the UAE, but that city-state is a bastion of financial responsibility.

So now that Dubai’s $59 billion debt mess is being mopped up by the Abu Dhabi-based central bank, how do you invest with the Gulf’s financial future in mind?

Believe it or not, renewable energy shares may be the best way to profit from the oil-rich UAE’s current financial turmoil…

Here’s the story and how you can play it.

A Tale of Two Emirates

Dubai fancies itself an emerging world leader in nearly everything. From tennis tournaments to financial exchanges, and from manmade islands to rotating skyscrapers, Dubai seems to be a city built on a feeling of inevitable greatness.

Destiny has its price, though, and for Dubai to convince everyone in the world that the former fishing village is a must-see destination where investing is easy and lucrative, the emirate had to take on mountains of debt.

Dubai World Group is the state-owned holding company that many Americans know from the political uproar surrounding its division Dubai Ports (DP) World in early 2006. As DP World acquired the British firm that managed strategically-located ports in places like Baltimore, New Orleans, and Miami, its sister company Nakheel was fueling a property boom at home.

With foreign workers doing all the lifting, Dubai World’s Nakheel development company financed the construction of business and residential skyscrapers whose parking garages would be filled with Ferraris. Then Lehman Brothers collapsed, bringing the global financial crisis to the forefront of every moneymaker’s mind and putting the brakes on Dubai’s high-octane dream.

By the time all is said and done, Germany’s Deutsche Bank (NYSE: DB) and Swiss financial group UBS (NYSE: UBS) both say home prices in Dubai may be down to only 20% of what they were worth in the third quarter of 2008. That means trouble for Nakheel, which asked last week for a break in trading on the bonds that financed its boom.

Credit rating agency Moody’s says that the $59 billion Dubai wants a break on could eventually total up to $100 billion.

On Monday, November 30, Gulf financial markets saw their first light since the Islamic Eid al-Adha holiday, which kept markets closed after Dubai World and Nakheel’s request for a reprieve mid-week.

Dubai’s stock market dropped by 7.3% on the re-opening. Abu Dhabi, where the central bank has said it will stand behind deposits at local and foreign banks operating in the UAE, was rewarded for its role in restoring calm with a wallop from investors — the Abu Dhabi exchange sank by 8.3% on Monday.

Long story short: Dubai’s indoor ski palaces and electronic trading platforms aren’t impressive enough to counterbalance declining faith in the value of its economic fundamentals.

But Abu Dhabi, with its UAE-leading oil revenue and a sovereign wealth fund worth around $700 billion, has invested in resources both old and new, including clean energy.

Abu Dhabi’s $15 Billion Clean Energy Bet

Reuters reports that national fund managers in deep-pocketed states like Abu Dhabi and China are pushing tens of billions of dollars into natural resources and energy as the global economy recovers.

Riskier financial institution shares and hyperinflated property speculation have fallen out of favor, and there has been well-publicized movement away from dollar-denominated holdings, even though U.S. Treasury bills remain attractive.

Abu Dhabi, with all its financial padding from petroleum revenue, is engaged in a massive project to ensure returns and revenue through renewable energy.

The monarchy has set up the Abu Dhabi Future Energy Company, whose main task is building a sustainable city for 14,000 people to live in by 2016. The city, called Masdar (Arabic for "source"), is a joint project between ADFEC, research institutions like Massachusetts Institute of Technology (MIT), and a select few international companies whose products will be used to make Masdar City carbon-neutral and waste-free.

At Masdar, a real-life laboratory for clean energy technology, smart grid connectivity, and bountiful desert solar power resources could make Abu Dhabi a patent machine. In fact, CEO Dr. Sultan Ahmed Al Jaber says that Abu Dhabi is already well on the way to patenting and exporting cleantech products and systems.

Back in March, Abu Dhabi had just bailed out Dubai to the tune of $10 billion in guaranteed bond purchases. I hoped then that the more responsible emirate would use its capacity to consult Dubai on green building and joint R&D that could make the entire UAE a symbol of next-generation energy prowess.

Instead, Dubai continued to opt for opulence, and it’s up debt creek again with Abu Dhabi getting its own paddle knocked in the water.

Dubai World and developer Nakheel have an opportunity to assume not only Abu Dhabi’s faith and credit but also its innovation-oriented ways.

Publicly-traded companies like First Solar (NASDAQ: FSLR) are already looking at Masdar as the bright side of the UAE’s tricky, interlinked economy. As we watch international markets react to Dubai’s debt mismanagement, we have another opportunity to check in on neighbors like Abu Dhabi that are getting development right.

There’s much more to the Masdar story, rest assured. You may not have heard much about it, but Gulf governments are clamoring to secure their peaking oil production for export, rather than use at home. That means reining in energy consumption and using oil wealth to finance a new energy boom that will create long-lasting economic benefits.

Stay tuned for a full report on Masdar later this week from Green Chip International, the premier global clean energy investing service.


Sam Hopkins
Sam Hopkins

International Editor

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