FACTBOX-Key political risks to watch in the United Arab Emirates

DUBAI, Nov 1 (BestGrowthStock) – The cloud over Dubai’s financial
future after the Dubai World debt crisis is the overriding risk
to watch in the United Arab Emirates.

Added to that are worries about an escalation of Iran’s
nuclear dispute with Western powers, a long-running territorial
row with Iran and Islamist radicalism.

DUBAI DEBT AND FINANCIAL WOES

The United Arab Emirates economy is expected to grow by 2.4
percent this year, the slowest in the Gulf Arab region, weighed
down by large debts at many of Dubai’s state-linked firms.

Dubai’s finances sparked concern after the global financial
crisis burst a property bubble, shelving multi-billion-dollar
projects and triggering thousands of job cuts. The UAE economy
was estimated to have shrunk 2.1 percent in 2009.

A $1.25-billion Dubai bond issue in September marked the
emirate’s return to debt markets since its November 2009 crisis.
The four times oversubscribed issue challenged predictions that
Dubai would have trouble tapping credit markets as the emirate
and its companies climb out of a $100 billion-plus debt hole.

The emirate shocked markets when Dubai World [DBWLD.UL], one
of the Dubai government’s three flagship holding companies, said
last November it would seek a delay in repaying $26 billion of
debt linked mainly to property units Nakheel [NAKHD.UL] and
Limitless, sending global markets into a dive.

Neighbouring Abu Dhabi, the seat of the seven-member UAE
federation and home to most of its oil wealth, lent Dubai $10
billion, helping to avert default on a bond issued by Nakheel.

Dubai World, with debt of around $39.9 billion, reached a
formal agreement in September with 99 percent of its creditors
by value to restructure some $24.9 billion of liabilities.

The company is prepared to sell prized assets including
previously ringfenced ports firm DP World (DPW.DI: ) to try to
raise as much as $19.4 billion to repay creditors, a document
presented to creditors in July showed. [ID:nLDE67O15E]

But investors are still worried about debt troubles at Dubai
Inc, as the network of state-linked firms are known.

Just days after the Dubai World agreement, Dubai Holding,
owned by Dubai’s ruler, requested a second delay for $555
million in loan repayments until Nov. 30 [ID:nLDE6890CV]. The
company has debt obligations estimated at $14.8 billion.

Private equity firm Dubai International Capital, a unit of
Dubai Holding which has around $2.6 billion of debt, requested
in September to delay a $1.25 billion loan for the second time,
requesting to repay at the end of November. [ID:nLDE68E19I].

Dubai’s debt crisis has strained relations between Dubai,
known for extravagant real estate projects, and the wealthier
but more staid Abu Dhabi. The two emirates have shared the
financial and political reins of the UAE since its inception in
1971, but further assistance from Abu Dhabi could boost its
role, possibly upsetting a delicate power balance.

What to watch:

– Will Dubai’s government-linked firms be able to make their
debt repayments?

– Will Abu Dhabi have to intervene further to meet any Dubai
debt obligations? Abu Dhabi would prefer Dubai stand on its own
and wants to contain further spillover from Dubai’s debt into
its economy and that of the federation.

BUSINESS SENTIMENT

Lack of transparency and worries about government guarantees
for the debt of massive state-linked companies will make
investors wary about keeping their money in the country.

Dubai needs to take concrete steps to improve transparency
and communication after initially leaving investors in the dark
and making overly optimistic and confusing statements.

Whereas other Gulf states funded growth with proceeds from
soaring oil prices, Dubai borrowed to invest through a network
of state-linked conglomerates that offered limited transparency.

Creditors lent to state-linked Dubai companies on the
implicit understanding that they would be backed by the Dubai
government only to find there were no such formal guarantees.

Dubai World’s troubles have raised fears among investors
that other state-linked firms could also face problems. Moody’s
downgraded seven Abu Dhabi state-linked firms in March, citing a
lack of explicit state support in the wake of Dubai’s crisis.

What to watch:

– The possibility of debt problems emerging in other
state-linked units, which could deter investment.

REGIONAL ISLAMIST MILITANCY

The United Arab Emirates, the world’s third largest oil
exporter, has been spared al Qaeda attacks. But as a transport
hub and business and tourism centre aligned with Western
interests, Dubai could make an attractive target for militants.

Last year, al Qaeda’s Yemeni and Saudi branches merged into
a Yemen-based regional arm, which claimed responsibility for a
failed plot to bomb a U.S.-bound plane in December.

The group has threatened attacks on Westerners in the region
and seeks the fall of the Saudi royal family.

U.S. officials have also said the group, al Qaeda in the
Arabian Peninsula (AQAP), was likely behind a plot in October to
mail two parcel bombs from Yemen on U.S. bound planes. One of
those bombs was seized in Dubai and the other in Britain.

The UAE does have tight security that may have helped it
ward off attacks until now, but as an old regional trade centre
it has had an open door to people from many walks of life. This
has also made it vulnerable to international score-settling.

Earlier this year a Hamas leader was killed in a Dubai hotel
room, in a hit widely blamed on Israel.

What to watch:

– Any expansion of AQAP attacks in the region could mean
other Gulf countries, including the UAE, are at risk. A serious
attack could unsettle markets, particularly energy.

IRAN ESCALATION, SANCTIONS

The Gulf Arab region, of major strategic value to Western
powers, is concerned about being drawn into any armed conflict
if a nuclear row between Iran and Western powers escalates.

Dubai’s close economic ties with Iran have also drawn
scrutiny from Washington, which has pushed hard for U.N.
sanctions on Tehran for refusing to halt its atomic activities.

U.S. officials regularly travel to the UAE to urge vigilance
against Iranian banks and businesses based there, and the UAE
central bank has asked financial institutions to freeze any
accounts belonging to dozens of Iran-linked firms.

Dubai is home to around 80,000 Iranians and thousands of
Iranian businesses. Last year, Dubai’s re-exports to Iran —
goods coming from Europe, Asia or elsewhere and then sold on to
Iran — rose 4.8 percent to 21.3 billion dirhams ($5.8 billion).

The UAE’s extensive purchases of U.S. arms and facilities it
offers to the U.S. military could make it a potential target for
revenge if the nuclear dispute spirals into a military conflict.

What to watch:

– Any signs the Iran nuclear dispute could turn to a
military conflict. That could deter outside investors, hit
global and local markets, and push oil prices sharply higher.

– More sanctions on Iran, a major Dubai trade partner, could
impact a recovering UAE economy.

TERRITORIAL DISPUTE WITH IRAN

A dispute with Iran over three Gulf islands located near
shipping lanes has rumbled on for three decades, with little
sign of it turning to armed conflict, but both sides remain
sensitive on the issue. Tehran issued a sharp riposte in April
after the UAE foreign minister drew parallels between Iran’s
control of the islands and Israel’s occupation of Arab land.

The islands, Abu Musa and the Greater and Lesser Tunbs, are
controlled by Iran but claimed by the UAE with broad Arab
backing. Ties with Iran have been strained since Iran installed
maritime offices on one of the islands in 2008.

What to watch:

– Any signs that either side might further escalate the
dispute, either with unilateral acts or through damaging trade,
which could dampen an economic recovery.

* For political risks to watch in other countries, click on
[ID:EMEARISK]
(Writing by Cynthia Johnston, Reed Stevenson and Erika Solomon;
Editing by Myra MacDonald)

FACTBOX-Key political risks to watch in the United Arab Emirates