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(IMF) that Dubai’s total debt is actually as much as US$109 billion, which is significantly up on previous consensus projec- tions of US$85bn. The process of debt restructuring, therefore, may not go so smoothly after all. What does still hold true, however, is Shuaa Capital’s point that it is the Dubai gov- ernment, and not the commer- cial entity of Dubai World, that is in charge of the restructuring and negotiation of the debt. As such, we believe that the final resolution would take into ac- count the bigger picture with re- gards to the following: (1) there are several government related entities (GREs) that will need to tap international markets to refi- nance debt falling due in 2010- 11; (2) how much local banks and contractors are negatively affected by the outcome of the restructuring, which could have significant repercussions and jeopardize local economic re- covery; (3) a resolution that is considered ‘hostile’ by foreign banks would drastically affect the ability of all Dubai based entities to raise foreign capital in the near future.” In short, it is in creditors’ best interests to be kind to Dubai, as anything too hurtful to the emirate may also hurt the international markets.
What the Future Holds
Although there is a certain de- gree of ambiguity surrounding what the future holds for Is- lamic finance in Dubai, we can attempt to speculate through analyses of several recent developments. The Dubai government, for instance, has announced that it is aiming to reverse its budget deficit in 2011, but not by issuing more sukuk, or any other type of paper for that matter. Instead, the powers that be intend to cut spending in order to bring about a budget surplus. Even though, at first sight, this should not have that much of an impact on the emir- ate’s massive sukuk market in the grand scheme of things, it will be interesting to see how this strategy pans out in 2010, the supposed year of the sovereign sukuk issue. Will Dubai’s Islamic finance mar- ket be left behind by other jurisdictions now seriously considering, or involved, in sukuk issuances. Only time will tell. Dubai risks being left behind even by its own fellow Gulf jurisdictions as those firms still disillusioned by the Nakheel crisis and the fluctuations in inflation rate move operations to Saudi Arabia, Qatar and Bahrain. In fair- ness to Dubai’s government, attempting to issue paper at this point might be somewhat of a lost cause considering investor sentiment is still recovering from the debt shock. Having said that, it would be very unlikely that the Dubai government will not try to encourage any type of Islamic investment. According to the article Why we Should Continue to Invest in Dubai (Aderemi, 2010), there are certain ac-
tive steps the government can take to make its jurisdiction more investor friendly. “Make conditions more amenable for investment in Dubai Holiday Rental or Dubai Real Estate. If the [government has] a com- prehensive plan with zoning so that population in one large area is served by the shops and establishments in that area, then no one would have to go very far for the daily con- veniences of life. Respect for human and property rights and enactment of laws are needed if investment is to be attracted to Real Estate in Dubai”.
In sum, both the history of Is- lamic finance in Dubai and the 2010 market outlook are tales of two halves. Dubai’s journey into the limelight this century has almost been in parallel to the journey Islamic finance has enjoyed, but both have been taken down a peg or two in the last two year or so by varying factors including the global re- cession, sukuk controversy and the Nakheel debt crisis. Mean- while, the first half of 2010 will continue to be challenging for the emirate’s Islamic finance market, but once further clari- fication is brought about by the commencement of debt negotiation and restructuring, things are expected to pick up for both Dubai’s Islamic fi- nance sector in particular and its economy overall.
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Additional Reading:
Elisabeth Eaves and Michael Noer (Eds.), Special Report: Islamic Finance, April 2008, Forbes
Aina Olusegun Aderem, Why We Should Continue to Invest in Du- bai, January 2010, American Chronicle
Heiko Hesse, IMF-Andreas Jobst, IMF-Juan Sole, IMF, Current Trends in Islamic Structured Finance and Capital Markets, Sep- tember 2008, Dubai International Financial Centre
Lionel Laurent, Capitals of Islamic Finance, April 2008, Forbes
Press Centre, DIFC Authority releases updated version of ‘Guide to Islamic Finance’, July 2009, Dubai International Financial Centre
2010 June GlobalIslamic Finance 55
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