Dubai will not default: Al Saleh

A top Dubai official has refuted any possibility of a debt default.

Explaining the Government’s measures taken to tackle the current economic crisis, Abdul Rahman Al Saleh, the Director-General of the Department of Finance, told a conference, “It is quite surprising that we are now seeing things like this said in the world's media about Dubai: Dubai default... Dubai debt meltdown... Dubai financial crisis… etc.

“It was inaccurate, it was unnecessary blind panic, it was a misunderstanding of the status of Dubai, which indeed is a centre of trade and economic activity, it was lack of knowledge of how much debt was the subject of the announcement and how it is related to the government debt.

“The reactions were caused by asymmetric information of the situation in Dubai,” he said.

He said, Dubai has positioned itself as a global centre of modernity, high finance and high tech projects, education and culture, from universities to sports, art galleries and museums.

“Dubai has become a land of economic opportunities and in a very short time attracted international attention and investments Brand Dubai has been built for decades on the basis of being a global business centre, perfectly located and commercially astute,” he said.

“A place with a long and successful commercial history, a place where it is safe to do business, where the business people really know and knew how to run successful companies.”

Explaining the current situation, he said, The effects of this boom-bust cycle of psychology are amplified when investors use leverage.

“Borrowing to purchase assets is lucrative when asset prices are rising, because all the upside beyond the interest costs goes to the investor, not the lender. However, when times are bad and asset valuations are falling, investors’ losses are magnified by leverage and investors cannot borrow in their own way to a good time forever,” he said.

As the crisis has unfolded, he said, there are signs that international banks and other lenders have become more risk-averse and they have tightened lending criteria somewhat.

“The household and business sectors have also become much more risk-averse than in recent years. Some indicators of this change include higher household saving, and a shift from debt to equity funding by some firms. Their demand for credit has weakened as they have become more cautious. Together with those tighter lending standards, this has contributed to a slowdown in credit growth.”

Full text of the speech

I am very pleased to be with you today and to have the opportunity to address such a distinguished gathering. I would like on this occasion to thank Dubai School of Government for inviting me to speak to you today.

The conference is concerned with an important subject: Natural Resources and Economic Development: Risks and Policy Changes. Yet, I think since September last year, no economic event whatever is the agenda can pass by what the IMF called" Global Storm" or the Global Crisis.

In its course of economic development- which is the main issue in this conference- and modernization, Dubai has positioned itself as a global centre of modernity, high finance and high tech projects, education and culture, from universities to sports, art galleries and museums. Dubai has become a land of economic opportunities and in a very short time attracted international attention and investments Brand Dubai has been built for decades on the basis of being a global business centre, perfectly located and commercially astute. A place with a long and successful commercial history, a place where it is safe to do business, where the business people really know and knew how to run successful companies.

Ladies and Gentlemen

The intensification of the current crisis following the Lehman failure in September saw the deterioration of many macroeconomic indicators around the world. Industrial output contracted sharply in many parts of the world. Commodity prices declined significantly towards the end of the year 2008. There was a sudden contraction in the volume of world trade. In this environment, forecasters have had to scale down their forecasts for output growth repeatedly.

As you are all aware, almost no county was in isolation of the "Global Storm" and of course, Dubai was not an exception as a Global business and financial center. Indeed, many financial systems around the world have been under extraordinary strain for the past year and a half. The macroeconomic and human consequences of that crisis are becoming all too clear.

These events have raised many questions for policy-makers and for market participants about causes and consequences of the crisis but I think the most important one –from a practical point of view- is what are the countermeasures that governments can take to reduce the costs of the present crisis and it speed up the recovery path?

As with any large event in any field of human effort, it is never about just one thing. There were many causes of the financial crisis, some recent and some longstanding. I would like to focus on the misperception and impact of crisis on Dubai.

Perhaps the most basic underlying driver of the crisis was the inherent cycle of human psychology around risk perceptions. When times are good, perceptions of risk diminish. People start to convince themselves that the good times will go on forever. When the cycle turns, risk aversion increases and often far beyond normal levels. We have observed how investors’ perception of risk changed in the years leading up to the crisis.

The effects of this boom-bust cycle of psychology are amplified when investors use leverage. Borrowing to purchase assets is lucrative when asset prices are rising, because all the upside beyond the interest costs goes to the investor, not the lender. However, when times are bad and asset valuations are falling, investors’ losses are magnified by leverage and investors cannot borrow in their own way to a good time forever.

As the crisis has unfolded, there are signs that international banks and other lenders have become more risk-averse and they have tightened lending criteria somewhat. The household and business sectors have also become much more risk-averse than in recent years. Some indicators of this change include higher household saving, and a shift from debt to equity funding by some firms. Their demand for credit has weakened as they have become more cautious. Together with those tighter lending standards, this has contributed to a slowdown in credit growth.

In this environment, the need for credible steps to restore the health of the financial system and businesses is crucial. In UAE, government has provided substantial support to financial institutions and market, especially when the signs of financial crisis start appearing. The central bank injected capital into banks and helped banks to reduce the risk in their balance sheets. Government is also providing macroeconomic stimulus through fiscal policy easing. On the other front, businesses need to be more efficient and able to cope with the new situation.

In this context, it quite surprising that we are now seeing things like this said in the world's media about Dubai:

Dubai default...Dubai debt meltdown...Dubai financial crisis... etc.

It was inaccurate, it was unnecessary blind panic, it was a misunderstanding of the status of Dubai, which indeed is a centre of trade and economic activity, it was lack of knowledge of how much debt was the subject of the announcement and how it is related to the government debt. The reactions were caused by asymmetric information of the situation in Dubai.

To comment on this, I will just quote the following from the latest issue of the "The Economist", "a week after Dubai World" announced its debt standstill; the financial panic seems to have disappeared as quickly as a desert squall."

Stock markets rebounded and it is tempting to see the affair as hiccup-damaging for the Dubai`s credibility and lacking broader significance of exaggerated media campaigns. This media hiccup has initially increased concerns and anxiety in the markets around the world but the message that the current crisis is not the sole phenomenon of Dubai`s major companies rather a global phenomenon. Of course, the reaction by the global markets was psychological, and came strongly. However, the reaction is now softening as investors and became more informative about what happened. Let me admit, in Dubai we are not good in publicizing what are doing as much as we are good in doing it.

Finally, if recent past precedent is any guide, then Dubai will be a winner from the current financial crisis. And remember, in big financial shakeouts there are always winners and losers. After 9/11 - which at the time looked an absolute disaster for inward investment into the Middle East - investors brought an estimated $1 trillion in the region from different parts of the world. Similarly, the invasion of Iraq in 2003 hardly appeared good for regional confidence at the time. Nevertheless, Dubai gained in the aftermath as a safe heaven in a troubled region.

We keep our ultimate objectives for the economy firmly in mind-sustained recovery to high levels of output and employment with price stability. Though we are operating in a highly uncertain world economic situation, we will continue to adapt our policies as necessary to accomplish these objectives.

Ladies and Gentlemen,

Thank you for your kind attention.