Abu Dhabi rises as Dubai sinks in debt

Dubai’s debt troubles have exposed the fallacy of its once much-vaunted “model” of raising shining cities in the desert with foreign residents, finance and labour.

They have also set in train a power shift towards Abu Dhabi.

Last week, Dubai’s government said it will ask creditors of two of its flagship firms, Dubai World and property group Nakheel, for a debt standstill as it restructures the Dubai World group.

Questions are now being raised by investors about whether Abu Dhabi will bail out Dubai and at what price?

Though Abu Dhabi is the United Arab Emirates capital, the seat of most of its oil wealth and the largest of the seven self-governing emirates by size, it took a back seat in recent years as Dubai undertook spectacular real estate projects as a tourism and finance hub.

Dubai’s population rocketed to 1.5 million, as white-collar professionals from around the world took plum jobs in a country marketed as a liberal enclave in the Gulf sun.

An army of Asian workers was hired to construct the glitzy projects, drawing accusations of slave labour from rights groups, while Dubai’s own citizens dwindled to a small minority, bringing strains as cultural values mixed warily.

Direct bail-out

Since the financial crisis, the credit-driven boom has ground to a halt, many of the more affluent foreigners have left and the freewheeling emirate -- a dynastic autocracy under the Al Maktoum family -- is left with up to $80 billion in debts.

Abu Dhabi has stepped in to help, but avoided a direct bail-out of its neighbour -- but it could be drawn into more direct backing if its own prestige is affected by Dubai’s woes.

“In exchange for Abu Dhabi providing cash, it wants Dubai to eliminate or reform a lot of the tangled web of competing Dubai-based companies,” Eurasia Group said.

“Dubai has been resistant to some of Abu Dhabi’s demands, and its leaders have seen their political power and prestige dissipate in wake of the financial crisis.”

The federal central bank -- effectively under Abu Dhabi control -- took up $10 billion of a $20 bond issue by Dubai government earlier this year, and this week two Abu Dhabi banks took up $5 billion.

Power shift

The fiasco is playing into Abu Dhabi’s ambition to unify UAE policies, clean up the Gulf state’s image and project the country as a political power in the region.