By Vivian Salama
After spending $20bn on Dubai's rescue package, Abu Dhabi is having to accept the financial crisis is catching up.
Times have changed for the Alimad Engineering and Contracting Company in Abu Dhabi.
Two years ago, the developer was building everything from twenty-story glass towers to luxury villas. It’s now shelving projects, the latest a $12m contract with a client who has $2m and the banks won’t give him any more money, said Ziad Ali, whose father founded the company twenty years ago.
“When investors don’t get funding, we don’t get their business,” Ali, 24, said.
If the palm-shaped islands and skyscrapers of Dubai came to symbolise the excesses of the economic boom in the Gulf, the less glitzy Abu Dhabi represented the sobriety. Yet after Abu Dhabi, home to more than seven percent of the world’s oil supply, spent $20bn on a rescue package for its desert neighbour, it too is having to accept the financial crisis is catching up.
Abu Dhabi, the largest of the United Arab Emirates and home of the central bank, forecast a second consecutive budget deficit this year, according to statistics included in a government-guaranteed bond prospectus released last month. Spending will exceed revenue by AED84.9bn ($23.1bn) this year after AED126.5bn in 2009.
While the emirate, which is home to one of the world’s largest sovereign wealth funds, is sticking to its plan to invest $500bn in industry and tourism by 2030, its property market is suffering along with Dubai, while local banks are lending less and companies are reassessing business plans.
“Nobody should be naive and think any place, whether the US or Abu Dhabi, has a bottomless pool of resources,” said Mohammed Ali Yasin, chief executive officer of Shuaa Securities, a brokerage in Abu Dhabi, until he leaves the post next month. “The impact this crisis would have here in Abu Dhabi was undermined initially. Now is a time for reassessment.”
When crisis struck in late 2008, cranes in Dubai halted and unemployed expats fled. Others, particularly in construction, started commuting the hour and a half across the desert to Abu Dhabi, home to more than 90 percent of the UAE’s oil reserves.
Unlike buildings such as the Burj Khalifa, the world’s tallest, Abu Dhabi took a more subtle approach, opting for projects such as the Guggenheim and Louvre museums.
The Abu Dhabi Economic Vision 2030 targets seven percent annual growth through 2015 and six percent thereafter. The emirate won’t reach that this year, Mohamed Omar Abdulla, undersecretary at the Abu Dhabi Department of Economic Development, said on February 2. A senior government adviser said in June he doesn’t expect any major revision to those estimates in the longer term.
The International Monetary Fund said on May 25 Abu Dhabi will grow 3.7 percent in 2010, while Dubai’s economy will shrink about 0.5 percent this year.
“There are some lurking vulnerabilities that should restrain growth,” Rachel Ziemba, an analyst at Roubini Global Economics in London, said by telephone. “Still, they have a strong net asset position.”
Revenue and expenditures at the Abu Dhabi Investment Authority, Abu Dhabi Investment Council, Abu Dhabi National Oil Co, Abu Dhabi Water & Electricity Authority, International Petroleum Investment Co and Mubadala Development Co aren’t included in the emirate’s budget. Royalties and taxes on crude oil and natural gas production from these entities are included, according to the prospectus.
The emirate’s other investments include minority stakes in Citigroup Inc and Gatwick Airport in London, as well as a majority stake in New York’s Chrysler Building.
The budget shortfalls are the first following four years of “significant surpluses,” according to the bond sale document from Waha Aerospace BV, an investor in aircraft companies and part of Abu Dhabi holding company Waha Capital.
The emirate’s loans and equity investments in the country are forecast to decline by almost half this year to AED36.9bn, the preliminary prospectus said.
Other industries also are feeling some pain. Masdar, the state-backed renewable-energy company, said in June it’s revising its business plan in an effort to ensure the project is “economically viable.”
“We were living in good times, had big plans to build our infrastructure and some of our companies were caught off guard,” said Mohamed Berro, CEO of Al Hilal Bank, a lender owned by the state-controlled Abu Dhabi Investment Council. “It will be a challenging year here for everyone.”
The government in March bought assets on Yas Island, home to Abu Dhabi’s Formula One raceway, from Aldar Properties PJSC, Abu Dhabi’s biggest real-estate developer, for AED9.14bn. Aldar that month became the first company in the emirate to get a “junk” rating from Moody’s Investors Service.
“The bigger developers, they are managing to keep their projects going and access the funding they may need,” said Guy Parsons, CEO of Profile Group, an Abu Dhabi developer. “Small developers — the ones that are not government-backed or family-backed — they are not getting the money owed. Developers need that cash but these days they can’t get it.”
Home prices in Abu Dhabi dropped more than 30 percent from the market’s peak in the second quarter of 2008, while values in Dubai declined by more than half, according to estimates by Swiss bank UBS AG.
Ziad Ali at Alimad Engineering and Contracting said there was once a time when his company was always guaranteed a piece of any business coming to Abu Dhabi.
For now, those days are gone. “We are all being affected,” he said.
Vivian Salama is a news columnist for Bloomberg.