The `Dubai dream’ may be over because lower oil prices will leave smaller fiscal surpluses among its crude-exporting neighbors to invest in the emirate, said Citigroup Inc.

“We believe it is safe to say the Dubai dream is perhaps over,” Citigroup economist Mushtaq Khan said in a report e- mailed today from London.

Dubai has borrowed from its neighbors and international banks, sparking a real-estate boom that saw residential property prices increase fourfold in the last five years. The bubble may be about to burst as HSBC Holdings Plc said Dubai and Abu Dhabi house prices fell for the first time this month, after credit markets seized up, banks tightened mortgage criteria and developers started to scale back projects.

The emirate “has been booming on the oil surpluses” from neighboring Gulf states and Russia, Khan said. “Dubai’s two specific concerns are its real-estate sector and how it will refinance the debt it has built up in recent years.”

The price of New York-traded crude has more than halved to about $55 a barrel since reaching a record $147.27 on July 11.

Gulf states will be able to maintain fiscal spending at current levels as oil remains above the breakeven point for most governments, Fitch Ratings said in a report on Nov. 11. New York-traded crude closed at $59.33 that day.

Dubai has borrowed to fund real-estate projects including Burj Dubai, the world’s tallest tower, and to buy stakes in companies such as Deutsche Bank AG as it seeks to diversify its economy away from oil.

`Much-Needed Correction’

“We see a much-needed correction in the property market,” Khan said. “Global conditions are likely to slow Dubai’s economic growth, but not knock it out.”

Dubai may need help from Abu Dhabi and the United Arab Emirates to fund a surge in borrowing, Moody’s Investors Service said last month. Abu Dhabi won’t allow Dubai’s state-owned companies to default on debt payments, Abu Dhabi Commercial Bank Chief Executive Officer Eirvin Knox said on Nov. 11.

Expectations that Abu Dhabi will bail out Dubai with a blank check are “unreasonable” Khan said, though “we do expect assistance from Abu Dhabi if the situation in Dubai gets difficult.”

Citigroup Chairman Win Bischoff said yesterday that the bank has “lots of billions” of dollars of exposure to Dubai. “I suspect the business model is not a bad one, based on trade, raw materials, services,” he said.

State-Owned Businesses

Dubai controls its economy through state-owned companies that dominate each major industry. Dubai Holding LLC, which groups assets belonging to Dubai Ruler Sheikh Mohammed bin Rashid al-Maktoum, owns hotel chain Jumeirah Group and Dubai International Capital, which unsuccessfully bid for Liverpool Football Club earlier this year.

Nakheel PJSC, the state-owned developer planning a kilometer-high tower in Dubai, said yesterday it will scale back some of its projects because of the global economic slowdown. Emaar Properties PJSC, the Middle East’s largest real-estate developer, said Nov. 13 it is reviewing its recruitment policies as credit facilities are squeezed and the property market slows.

The cost of hedging against losses sold by Dubai and Abu Dhabi have soared as investors worry that a worsening property market and plunging stock values will make it more expensive for the Gulf emirates to borrow.

Credit default swaps linked to Dubai Holding LLC rose 30 basis points yesterday to 1,000 basis points, a more than fourfold increase since July. Credit default swaps insuring Abu Dhabi’s sovereign debt have increased more than four and a half times in the same period.

Khan said some highly leveraged companies such as Dubai World, Borse Dubai, DIFC and Nakheel need capital restructuring as a part of a comprehensive effort to consolidate state-owned businesses.

“Strategic mergers could be a strong source of comfort to creditors, and also reduce the refinancing requirements,” he said.

Source: Bloomberg By Camilla Hall

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