Abu Dhabi invests in chip firm, Dubai should be next

Abu Dhabi is paying $1.8 billion to buy Singapore-based chip maker Chartered Semiconductor, taking advantage of relatively depressed global asset prices. Yet a far more logical home for its surplus oil wealth would be to invest heavily in neighbouring Dubai.

The commercial logic from the standpoint of both Abu Dhabi and Dubai is overwhelming. Abu Dhabi knows and trusts its neighbour and has admired its entrepreneurial flair for years. Asset prices in Dubai have sunk during the recession since last September and must represent an excellent deal in many cases.

From the perspective of Dubai the big choice is whether to gradually pay off a debt pile that could now exceed $100 billion, something that will take many years but is still possible as a highly profitable regional port, logistics, financial and trading centre, or to sell equity to Abu Dhabi and greatly accelerate this process.

Eliminating debt

Consolidating a debt position in a single country like the UAE is a relatively simple process, especially when you have a city like Abu Dhabi which not only enjoys a massive cash flow from oil but also has the accumulated capital reserves from 40 years of high production.

You simply net off the debts of Dubai against the wealth of Abu Dhabi. And how do you value the wealth of Abu Dhabi? Are its sovereign wealth funds now worth $350 billion instead of $800 billion at the peak of the boom? How much are almost 10 per cent of the world’s oil reserves worth considering its low production costs and the cash flow from ongoing production?

It does not need much imagination to see that the balance sheet of the UAE is actually easily the best in the world. The net asset position is fantastic, and the debts of Dubai very small in relative terms, and it is not as though Dubai could not service its debt if it so decides.

High investment returns

However, surely the best available investments for Abu Dhabi’s wealth are in Dubai, and the best way for a fast return to economic growth in Dubai is for Abu Dhabi to invest.

This commercial logic is so overwhelming that there is a sense of inevitability about what is surely going to happen.

You can see this as a fraternal move in a federal country. But it would also simply be good business for both parties and a win-win move with Dubai sacrificing a little pride for higher economic growth levels, and Abu Dhabi securing its asset position for future generations.