The Gulf’s Swaying Palms Shadow

Gulf stock markets were spooked by popular protest movements in the Mediterranean basin with parallels drawn to anti-inflation and government transition calls as they otherwise meandered early in 2011, with the UAE especially in thrall to the continuing debt saga at Dubai state-linked companies. Lawsuits stacked up against DW’s Nakheel property arm for contractual failures at the Palms island development and other ventures, as trade creditors were offered a 40 percent cash and 60 percent Islamic bond deal they reluctantly accepted. It may account for half the $25 billion in restructured obligations at the parent under an accord reached late last year which contemplates asset sales of $20 billion over the next decade for repayment, although current valuations put core port and other holdings at half that amount. Nakheel, which faced a $4 billion sukuk default before Abu Dhabi authorities stepped in, has recently seen the pattern followed by other major real estate companies that have turned to the emirate’s sovereign wealth funds for debt and equity lifelines. Dubai Holding and its three subsidiaries are now in negotiations on a $12 billion rescheduling, with the finance affiliate, with stakes in Malaysia and elsewhere, in the worst shape although its luxury hotel business is still buoyant. The commercial group has $3 billion in bonds due this year and next, and has already proposed partial honoring in contrast with workouts’ practice to date of full eventual coverage. Despite a successful return to bond markets as the DW pact was previewed, Dubai’s far-flung operations owe almost $20 billion this year, according to official and private calculations. The Investment Corporation which owns the airline is also likely to suffer from diminished travel in the wake of Egypt’s and broader regional unrest at the same time a large order was placed for fleet expansion that will require up-front installments. For their part, banks have endured another blow from the inability to send remittances to Cairo with the turmoil, with the Gulf accounting for the bulk of $7.5 billion sent from abroad in 2010, according to the World Bank.

In Saudi Arabiapredicted inflation at almost 6 percent will outpace non-oil GDP growth, as budget spending increases another 10 percent. Government wages will be hiked double-digits, and education, health care and infrastructure are priority items although oil near $100/barrel should continue to generate an ample fiscal surplus. Kuwait too has experienced higher prices and Bahrain has yet to untangle the morass of indebted family groups with large local and offshore bank exposures. Outside Arab markets Israel as well has invited investor qualms with intended withholding on previous tax-free debt to deter currency-boosting inflows even as its biggest peace partner indefinitely awaits a leadership boost.

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