Reuters
The cloud over the financial future of Dubai after the Dubai World debt crisis is the overriding risk to watch in the United Arab Emirates this year.
Added to that are some lingering worries about an escalation of Iran's nuclear dispute with Western powers, a long-running territorial row with Iran and Islamist extremism.
DUBAI DEBT AND FINANCIAL WOES
The United Arab Emirates' economy is expected to grow by 2.5 percent this year, the slowest pace in the Gulf Arab region, as large debts burdening state-linked firms in Dubai weigh on a recovery following the Dubai World debt crisis.
Dubai's finances had already been a subject of concern after the global financial crisis popped a property bubble that saw multi-billion-dollar projects shelved and thousands of job cuts. The UAE economy is estimated to have shrunk 1.4 percent in 2009.
But the real shock came when Dubai World, one of three flagship holding companies of the Dubai government, said in November it would seek a delay on repaying $26 billion of debt linked mainly to property units Nakheel [NAKHD.UL] and Limitless, sending global markets into a tailspin.
Neighbouring emirate Abu Dhabi, the seat of the seven-member UAE federation and home to the bulk of its oil wealth, lent Dubai $10 billion in a two-part bailout, helping avert default in December on an Islamic bond issued by Nakheel.
Dubai World reached a deal in May to restructure $23.5 billion in debt with its core lenders, addressing the most immediate of a string of problems facing investors in Dubai.
The deal, which includes no new money from the government, must still be agreed by banks outside the core negotiating panel, which holds 60 percent of the exposure. Failure to reach a final agreement with creditors could damage the UAE's ability to tap credit markets for years to come, hindering growth.
Analysts say Dubai World's debt crisis has strained relations between Dubai, known for extravagant real estate projects, and the wealthier but more staid Abu Dhabi.
The two emirates have shared the financial and political reins of the UAE since its inception in 1971, but further assistance from Abu Dhabi could boost its role at the helm of the federal union, possibly upsetting a delicate power balance.
What to watch:
- The final outcome of the Dubai World deal with creditors. Failure would push the cost of insuring Dubai's debt in the credit default swaps market to new heights along with bond yields for its companies. A negative result could also depress investor sentiment, hampering future prospects.
- Will Abu Dhabi have to intervene further to meet any Dubai debt obligations? While intervention could prevent potentially disastrous repercussions of a default, it could also set a precedent that Abu Dhabi will always step in to solve the problems of its flashy neighbour. Abu Dhabi would prefer Dubai stand on its own and wants to contain further spillover effect from Dubai's debt onto its economy and that of the federation.
BUSINESS SENTIMENT
Lack of transparency and worries about government guarantees for the debt of massive state-linked companies will make investors wary about keeping their money in the country after Dubai's debt debacle.
Dubai needs to take concrete steps to improve transparency and communication after initially leaving investors in the dark about the fate of their money and making overly optimistic -- and confusing -- statements at the height of the crisis.
Whereas other Gulf states funded growth with proceeds from soaring oil prices, Dubai borrowed to invest through a network of state-linked conglomerates that offered limited transparency.
Creditors lent to state-linked Dubai companies on the implicit understanding that they would be backed by the Dubai government only to find there were no such formal guarantees.
Dubai World's troubles have raised fears among investors that other state-linked firms could also face problems. Moody's downgraded seven Abu Dhabi state-linked firms in March, citing a lack of explicit state support in the wake of Dubai's crisis.
What to watch:
- The possibility of debt problems emerging in other state-linked units. Fresh Dubai debt problems could hamper investment.
REGIONAL ISLAMIST MILITANCY
The United Arab Emirates, the world's third largest oil exporter, has so far been spared major al Qaeda attacks that have hit other Gulf states but as a regional business and tourism hub it could make an attractive target for militants.
Al Qaeda sparked fears of a regional resurgence after the merger last year of the group's Yemeni and Saudi branches into a Yemen-based regional arm, which went on to claim responsibility for a failed plot to bomb a U.S.-bound plane in December.
The group has threatened attacks on Westerners in the Gulf region and seeks the fall of the U.S.-allied Saudi royal family.
While the UAE may not be al Qaeda's top target in the region, it has many potential targets, with a large expatriate population and Western institutions such as retail outlets, restaurants, banks and schools, as well as bars and nightclubs.
The UAE does have tight security that may have helped it ward off attacks until now, but as an old regional trade centre it has had an open door to people from many walks of life. This has also made it vulnerable to international score-settling.
Earlier this year a Hamas leader was killed in a Dubai hotel room, in a hit widely blamed on Israel.
What to watch:
- Any expansion of attacks by the Yemen-based al Qaeda arm in the region could mean that all Gulf countries, including the UAE, are at risk of being targeted. A serious attack could unsettle local and international markets, particularly energy.
- Could the UAE become the scene of more political assassinations by foreign elements? More score-settling could be destabilising and has the potential to prompt the UAE to tighten entry rules on what has been an open business and tourism hub.
IRAN ESCALATION, SANCTIONS
The Gulf Arab region, of major strategic value to Western powers, is seriously concerned about the possibility of being drawn into an armed conflict if a nuclear row between Iran and Western powers escalates further.
In addition, Dubai's close economic ties with non-Arab Iran have drawn scrutiny from the United States, which is pushing for a fourth round of U.N. sanctions on Tehran for refusing to halt its atomic activities.
Washington and its allies suspect Shi'ite Iran, just across the water from the Sunni-dominated UAE, of seeking a nuclear weapons capability. Iran says it wants to generate electricity.
U.S. officials regularly travel to the UAE to urge vigilance against Iranian banks and businesses based in the UAE.
Further economic measures against Iran could hit Dubai, home to around 80,000 Iranians and thousands of Iranian businesses.
Last year, Dubai's re-exports to Iran -- goods originally coming from Europe, Asia or elsewhere and then sold on to Iran -- rose 4.8 percent to 21.3 billion dirhams ($5.8 billion).
The UAE has tried to walk a fine line on Iran to avoid both alienating a trade partner and drawing Washington's ire, and has said it would abide by all U.N. Security Council resolutions.
The UAE's extensive purchases of U.S. arms and facilities it offers to the U.S. military could make it a potential target for revenge if the nuclear dispute spirals into a military conflict.
What to watch:
- Any signs the Iran nuclear dispute could turn to an armed conflict. That could deter outside investors, hit global markets -- with a knock-on effect on local ones -- and push oil prices sharply higher.
- Further sanctions on Iran, a major Dubai trade partner, could impact a recovering UAE economy, and Abu Dhabi could come under more U.S. pressure to clamp down on trade links.
TERRITORIAL DISPUTE WITH IRAN
A territorial dispute with Iran over three Gulf islands located near key shipping lanes used for oil and gas export has rumbled on for three decades, with little sign of it turning to armed conflict, but both sides remain sensitive on the issue.
Tehran issued a sharp riposte in April after the UAE foreign minister drew parallels between Iran's control of the islands and Israel's occupation of Arab land.
The islands, Abu Musa and the Greater and Lesser Tunbs, are controlled by Iran but claimed by the UAE with broad Arab backing. Ties with Iran have been strained since Iran installed maritime offices on one of the islands in 2008.
"Occupation of any Arab land is occupation ... Israeli occupation of Golan Heights, southern Lebanon, West Bank or Gaza is called occupation and no Arab land is dearer than another," Foreign Minister Sheikh Abdullah bin Zayed al-Nahayan said.
The UAE remarks have enraged Tehran, which accused the UAE of "brazenly and impudently" likening Iran to arch-foe Israel.
What to watch:
- Any signs that either side might further escalate the dispute, either with unilateral acts or through damaging trade, which could dampen an economic recovery.
- Tehran warned of an intense popular reaction if the occupation remarks were repeated, but the UAE foreign minister again made similar assertions on a visit to the West Bank.
By By Cynthia Johnston, Editing by Samia Nakhoul
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