Has Dubai really served its time in the financial desert?

“Between now and 2020, you will get some of the wildest ideas coming from

Dubai,” Shaibani told The Telegraph in an interview in his office in the

heart of Dubai’s financial district.

“I think we really need something big, but what it is I don’t know.”

Almost written off five years ago when the financial crisis exposed its

dependence on borrowing, Dubai has bounced back after restructuring most of

its debts and moving closer politically to its oil-rich partner, Abu Dhabi,

which dominates the federation of seven emirates that make up the UAE.

Hotels are once again booked out, its commercial districts and ports are

buzzing and, more importantly, real estate prices are once again on the

rise.

In pure economic terms, Dubai’s rise to prominence has been meteoric. In the

past decade its gross domestic product more than quintupled to around $82bn,

according to official figures. Its rise – without the direct benefit of oil

– once led US president George W Bush to describe the emirate as “a model”

for the entire Middle East.

With little of its own oil or gas, Dubai’s rulers have historically placed

investments, commerce and rapid urban development at the centre of an

economic strategy based on the philosophy of “build and they will come”.

Much of the task for ensuring that enough finance is in place for the World

Expo’s various projects, due to take shape on land near Jebel Ali, about 25

miles from the centre of Dubai, will fall largely on the shoulders of

Shaibani.

Ranked in the top five most powerful Arabs in finance – alongside heavyweights

such as Saudi Arabia’s Prince Alwaleed bin Talal – by Gulf Business

magazine, Shaibani is the chief executive of the Investment Corporation of

Dubai (ICD). Set up in 2006, the ICD controls the emirate’s most treasured

and valuable investments, including stakes in companies such as Emirates

Airline, Emaar Properties, the London Stock Exchange and Nasdaq.

Shaibani is also part of the trusted inner circle of the emirate’s ruler and

vice-president of the UAE, Sheikh Mohammed bin Rashid Al Maktoum. Although

Shaibani says that much of the funding for the Expo is already factored in

to Dubai’s budget, the government is looking at alternatives such as opening

up infrastructure projects to international investors for the first time

through public private partnership (PPP) initiatives, or issuing Islamic

bonds known as sukuk. There is also the possibility, if required, of selling

stakes in some of the companies within the ICD’s portfolio, such as

Emirates, through initial public offerings (IPOs) on local and international

stock exchanges.

“We have an option if we need it,” said Shaibani. He names Emirates, Dubai

International Airport, Dnata and Dubal – the emirate’s giant aluminium

smelter – among the companies that could have stakes sold off to the public

if funds were ever required. Combined, these four entities alone had

revenues in the past financial year of more than $24bn.

Selling stakes in these prized companies would be a dramatic change in policy

for Dubai, which has fiercely held on to its most highly regarded financial

assets. However, Shaibani says that pursuing such a strategy in the future

“would be a fantastic way to raise capital if we need to”.

Unquestionably, Emirates is the crown jewel in Dubai’s investment portfolio

and arguably its most valuable asset. The company, which is the world’s

largest long-haul carrier, has turned a profit in each of the past 25 years.

Despite the problems of high fuel costs and fluctuations in international

traffic due to catastrophic events such as the September 11 attacks in New

York, Emirates has defied industry trends that have wrecked many

international rivals.

By 2020, the company aims to be carrying 70m passengers a year, nearly twice

the current number. By that time, it will operate a giant fleet of 250

aircraft from Dubai, which will boast two of the world’s busiest airports.

“We are dead serious. I cannot list it [Emirates] now because there is still

value to be created there,” Shaibani said. “We don’t want to give away value

just like that.

“Ideally, we would like to list here but we also have the option of a

secondary listing either on the London Stock Exchange, which is very

strategic for us because we are the largest shareholders.” Dubai owns a 20pc

stake in the LSE.

After spending a large part of his career in London and then Singapore, where

he managed Al Khaleej Investments in Asia, Shaibani rose to prominence

during the emirate’s darkest hour in recent history. The emirates shocked

the markets in November 2009 when it announced it needed to freeze $26bn of

debt owed by one of its largest “Government-Related Entities” (GREs), Dubai

World.

The move sent global markets plummeting and saw debt restructuring

consultants, including Shriti Vadera, a former adviser to Gordon Brown,

descend like hawks on the emirate.

The financial crisis brought to an abrupt halt a debt-fuelled real-estate boom

in Dubai, and with it many of the vast projects that had transformed the

city from little more than a pearl fishing village 50 years ago into today’s

global mega-city. Faced with debts that some international banks had

estimated to exceed $100bn, Shaibani was placed in charge of the effort to

restructure the emirate’s finances and a foreign investment strategy that

had seen billions squandered on trophy assets.

At the peak of its overseas investment binge in the middle of the past decade,

Dubai held stakes in, or owned outright, high-profile companies and assets

such as DaimlerChrysler, the old cruise liner Queen Elizabeth II, Cirque du

Soleil and the US department store chain Barneys New York.

In 2012, Dubai finally gave up hope of turning around debt-laden Barneys,

which one of the emirate’s funds had rushed into buying for $942m in 2007.

Ignominiously, Dubai eventually handed most of the company over to its US

creditors.

In hindsight, Shaibani said the deal to buy Barneys was typical of some of the

errors made at that time by executives who were given too much leeway to run

some of Dubai’s main sovereign wealth investment vehicles.

“It was a little bit of a dreamland,” he said, stressing that the “era has

gone” and that Dubai won’t be putting all of its “eggs in somebody else’s

basket” again when it comes to investing outside its home territory, or even

the Middle East.

When Dubai does invest overseas, the money will now most probably be focused

on building up its core strengths of transport, tourism and real estate.

“We’re still investing very heavily overseas but definitely we are wiser

than before,” he said. Africa has increasingly become a focus, led by

initiatives such as the Dubai government-owned DP World’s port facility in

Djibouti and Emirates opening up more routes to the continent than any other

carrier.

China is another important market, where Dubai has recently signed an

agreement to build an Atlantis resort modelled on the giant water park

showpiece of the emirate’s Palm Island.

The UK is also viewed as a major destination for future investment. The London

Gateway Port, the new deep-water harbour at the mouth of the Thames, was

made possible by £1.5bn of investment and project finance from DP World,

which inherited the site when it took over PO Ports in 2005. “The UK is

very strategic for us,” said Shaibani. “Traditionally, we have always felt

the UK was a very healthy market.”

Dubai and the UK have a close historical relationship, which dates back to

when the Arab sheikhdoms of the Gulf came under the protection of the

British authorities in the region before the 1970s.

Those close ties remain, with an estimated 100,000 UK expatriates – by far the

largest European community in the Gulf – living and working in the emirates.

British managers have also played a key role in building Dubai, including

the recently-knighted president of Emirates, Sir Tim Clark, who has been

with the airline since its first flight – to Karachi – in 1985.

British banks, including the Royal Bank of Scotland, Lloyds and Barclays, have

also traditionally played an important role in Dubai and were at the

forefront of some of the debt restructurings needed five years ago.

Although he is now focused on moving Dubai’s economy forward, Shaibani

continues to deal with some of the legacy issues that are related to the

pile of debt that still remains. Banks have recently expressed concerns

about Dubai’s ability to finance new projects while meeting its schedule for

repayments.

Some analysts have said that Dubai and its GREs still hold total debts of

$100bn, a figure that Shaibani says is too high. According to his figures,

the government’s direct liabilities are closer to a third of GDP,

approximately $25bn, which is more manageable.

“We honoured all of our commitments. We delivered every single project on

time. We did not miss a deadline from the beginning of the crisis except

those two entities [Dubai World and Dubai Holdings],” he said.

“Some of these companies that we stepped in to assist during the so-called

‘financial crisis’, they’re literally too big to fail so we had to support

them because they had an impact on the financial institutions. This is

something that any government would do – we stepped in.”

Recently, an agreement has been reached in principle with the Central Bank of

the UAE to roll over a $10bn bond facility at a lower rate of interest. The

bond fell due this month and settling the issue has cleared any immediate

shortfall concerns.

“We can choose to pay or to extend, but we have chosen to extend,” said

Shaibani, stressing that the terms of the new agreement are at a rate of

interest lower than the 4pc set out in the original deal. Greater

co-operation with Abu Dhabi has been one of the more positive changes to

come from the crisis after initial fears that it would mean Dubai losing

much of the autonomy it has traditionally enjoyed.

Each individual emirate has historically retained control of its own finances,

but since 2009 the country has increasingly appeared more federal under the

leadership of Abu Dhabi and its ruling Al Nahyan family.

The virulent pace of the financial crisis in Dubai, which saw property prices

fall by 50pc overnight and even the volume of the normally bumper-to-bumper

traffic on the emirate’s main Sheikh Zayed motorway dwindle, raised concerns

that the government had little choice other than to go cap-in-hand to Abu

Dhabi. However, Shaibani insists that at no point were Dubai’s finances too

stretched to cover its immediate liabilities.

“The facility that we got, that was agreed with Abu Dhabi. We did not go and

ask for any facilities,” he said.

“We went to the market in the middle of the crisis. We were oversubscribed. We

never really had a problem at all in raising [finance].”

According to Shaibani, most of the problems were directly linked to Dubai

World and Dubai Holding, which both had to be restructured. “Everybody has

debts, in reality the whole world has some kind of a debt,” he said.

Shaibani also believes that the World Expo, which was strongly backed during

the bidding phase by the country’s influential foreign minister, Abdulla bin

Zayed Al Nahyan, will create a “huge synergy” between Dubai and Abu Dhabi.

Iran is another neighbour in the region with whom Dubai has historic economic

ties – ties that could soon be revived. Trade with Iran was a major

contributor to the emirate’s economy before the imposition of tough

international sanctions against Tehran. Overnight, the volume of goods

shipped from Dubai to Iran on trading dhows moored along the Dubai Creek

dropped. Foreign exchange and banking transactions also fizzled out, as

total trade fell by a third.

Dubai’s tolerance of trade with Iran has always been a sensitive issue within

the UAE, ever since the Islamic republic seized control in the early 1970s

of some disputed islands in the Persian Gulf. However, a warming of

relations between the US and Tehran could soon see a return of this business

to the emirate at a vital time.

“The business community in Dubai paid a heavy price because of sanctions

against Iran,” said Shaibani. “If Iran opens up again, that will boost

everything that we do.”

During the “Arab spring”, Dubai and the UAE in general avoided the kind of

political unrest seen elsewhere in the Gulf, such as Bahrain and Oman.

Although the UAE has been criticised by Human Rights Watch for cracking down

on freedom of expression and detaining dissidents that it suspects of being

linked to Islamist groups, some parts of the economy, such as real estate,

may have benefited from the “flight of capital” away from countries that

faced political turmoil. Shaibani gives the example of Libyans coming to

Dubai to buy items they cannot get back in the war-torn North African

country.

“It hasn’t been a spring for the countries that went through this process,” he

said.

Despite the clear signs of recovery throughout Dubai – its economy grew by

almost 5pc in the first half of last year – some economists are concerned

that history may be repeating itself. Signs of an overheating property

market, rising living costs and a reliance on debt remain big concerns that

were recently raised by the International Monetary Fund.

“The total cost, pace of execution and financing of the new mega-projects

remain uncertain,” said Harald Finger, head of mission to the UAE at the IMF

following his recent assessment of the country.

“If not implemented prudently, these projects could exacerbate the risk of a

real estate bubble. Moreover, these projects may create additional financial

risks for Dubai’s government-related entities and the banking system in

light of the still considerable debt overhang from the 2009 crisis.”

A recent rally in the Dubai Financial Market general index, which had gained

177pc since 2008, came to a sudden end last week after the fund manager,

BlackRock, said that it had cut its holdings in the emirate’s shares.

The fund acted amid concerns over high levels of speculation on the Dubai

market. Citibank has also questioned the overall economic benefits that will

come from hosting the World Expo.

“We think the government expenditure directed towards the Expo will need

to be diverted, at least in part, from other areas of spending to avoid an

excessive build-up of debt. Finally, the legacy economic value of the event

is highly uncertain, as the unutilised buildings from the Shanghai World

Expo 2010 attest,” wrote Farouk Soussa, Middle East economist at Citigroup,

in a recent note to investors.

To add to these challenges is greater regional competition. With more

progressive leadership, Dubai had a head start over the likes of Doha in

Qatar, and in some respects Abu Dhabi, in terms of opening up its economy.

But they are now both catching up fast.

Qatar is due to host the World Cup in 2022 and Abu Dhabi is now following a

similar path by building world-class airline and tourism projects.

Crucially, in the race to be the region’s pre-eminent city-state, both

sheikhdoms have vast wealth drawn from their oil and gas exports, which is a

luxury that Dubai does not possess. However, Shaibani remains unfazed.

“We see a fantastic seven years coming up,” he said. “We want to be the centre

of this region. I want this expo to last forever.”

Has Dubai really served its time in the financial desert?