Weekly international investment round up to 22 September 2009
• Falling oil revenues and the financial crisis shake the Middle East
• Dubai World looks to restructure debts
Just over a year ago oil prices were touching $147 per barrel now they are less than half of that. On Monday, oil prices fell by another $3 with US crude down to $69.26 and London Brent sitting at $68.36 as the nervous September markets contemplated the effects of lower demand and comparatively high stock levels with even the ‘Centre for Global Energy Studies’ stating oil prices are unlikely to rise by much unless clear signals emerge that the world is pulling out of recession in a sustainable manner.
For the region which controls an estimated 60 per cent of the worlds entire oil reserves this is clearly worrying. Throughout the Middle East oil is the financial life blood which keeps many of its people in work and funds much of their massive infrastructure projects and without the high oil revenues literally greasing its economic wheels many of these projects have now simply ground to a halt.
Equally, the widespread fallout of Middle Eastern money drying up should not be discounted. For example, Bloomberg announced this week that Dubai’s ‘Istithmar World’ is freezing investments as part of a restructuring process which may ultimately result in the sale of its assets or even its liquidation.
Istithmar World is part of the state-owned Dubai World, whose real estate unit ‘Nakheel’ is allegedly struggling to refinance $3.52 billion Islamic bonds maturing in December. Nakheel is the unit behind the famous series of palm-shaped, man made islands on the emirates coast. Dubai World now has estimated liabilities of $59 billion representing a large proportion of the Gulf emirate’s total debt.
When times were good and the world economy booming Istithmar went on the mother of all spending sprees blowing an estimated $27 billion buying numerous stakes in international brands such as Cirque De Soleil, the Barney’s restaurant chain and the MGM Mirage hotel. Barney’s is now reportedly close to bankruptcy while the MGM Mirage has seen it’s stock price fall from $95 dollars to $12.
When prices were high oil was earning Saudi Arabia a billion dollars a day now it’s just over two-thirds of that, still a huge amount but with much of it already committed to projects the region finds itself eating into its cash reserves which is an unfamiliar situation. Over recent years the Arabian peninsular has tried to diversify into different sectors so as to dilute the potential impact of any potential shift in oil prices with property development a particular favourite however, even this has been hard hit with Dubai home prices dropping by nearly half in the second quarter compared to last year based on a recent report by Knight Frank as rapid and almost uncontrolled building has left a vast oversupply of property.
Dubai’s boom to bust is also likely to see the merger of its two top stock exchanges, the Dubai Financial Market and the Nasdaq Dubai, and lead to other structural reforms in what is the region’s major financial centre.
The mirage of never ending good times built on oil has been shaken and suddenly the water level at the oasis doesn’t seem quite so high.