Introduction

Middle East region, land of the most vital resource; oil, is also considered to be one of the
wealthiest regions of the world. With enormous wealth also comes the need to reinvest this
wealth and earn higher and higher yields. Similarly, some institutions also need to borrow to
undertake the planned development programs. Obviously, institutions with no other alternative to
generate income, for instance through sale of oil, need to borrow extensively to undertake such
plans. With borrowing also come repayments, which if defaulted, would have some adverse
consequences, not only for the borrowing institution, but also for the lender and other interrelated
institutions.

Of course, by investing institutions we refer to investments done by major institutions of regions

as Abu Dhabi, which with rising oil prices and falling markets(as a result of the financial crises)
took no second chances in buying securities at low prices. The prime intention was to earn high
yields, but the gradual consequences proved otherwise.

Also, we will be discussing regions as Dubai, which had no better alternative of undertaking
glittering development than through borrowing, and hence, its construction and development
institutions borrowed heavily. However, when the time came for repayments, they were delayed.
The news of delayed repayments was greeted with hostile attitude in the investment environment
of not only Dubai but also other regions of UAE like Ajman.

To sum up, in our report we plan to highlight an in depth view of the current Middle East crises.
We will observe whether it has got to do anything with the recent Global Financial Crisis.
Furthermore, we will interlink some major crises within the Middle East region and try to
establish a cause and effect relationship between the respective regions under our study. In
addition, we will also arrive at conclusions based on facts of whether this Middle East crises may
evolve into yet another major crises affecting nations other than those in the Middle East nation,
or whether efforts are being emphasized to contain this crises on a minimum scale possible, and
exactly how ‘minimum’ would that scale be.

The impact of all these events on the prices of oil, real estate and banking sector would also be
examined. Also examined would be the impact of all these effects on the GDP and GDP growth
rates of specific regions. To illustrate such relationships, aid of graphs and charts have been
acquired which has added to the clarity of our report.

We hope that this effort at unraveling and presenting the complex relationships between nations
is worthwhile and makes a positive contribution in the understanding of whoever wishes to learn
on the topic.
 Abu Dhabi

Abu Dhabi is one the seven emirates of UAE. It is one of the major contributors to UAE in terms
of GDP followed by Dubai. Abu Dhabi constitutes 95% of the oil and 92% of gas reserves that
UAE has, hence, it holds 9% of the world’s proven oil reserves (98.2bn barrels) and almost 5%
of the world’s natural gas (5.8 trillion cu metres). Therefore, Abu Dhabi enjoys a significantly
strategic position for UAE in terms of economic earnings and development.

Abu Dhabi in the recent years has enjoyed several benefits and suffered certain setbacks. To
begin with Abu Dhabi in 2008 enjoyed a nominal GDP growth rate of around 30% which was
backed by two main factors: rising oil prices and the increased public investment in various
industrial sectors.

In 2008, per barrel price of oil reached as high as $95 dollar, oil being a major revenue earner for
Abu Dhabi; and UAE as Abu Dhabi has 95% of UAE’s oil reserves, the GDP grew drastically in
the first three quarters of 2008, both in real and nominal terms. Sufficient data could not have
been obtained for the construction of respective charts for Abu Dhabi, so the real GDP growth
rate of UAE can be observed in Fig. A. The figure clearly shows that there was a rise in the real
GDP of UAE in 2008; in 2008 Abu Dhabi accounted for 56.7 per cent of the UAE's total GDP.
Hence, 2008 was a period of optimist future and accumulation of funds for future development
projects, which was a rather short lived period as we shall see that oil prices plunged deep in the
later part of 2008.

Fig. A

Another reason for the high GDP growth rates in 2008 is the increased investment in industries
particularly communication and construction. The construction boom of 2007-08 also helped this
to take place. Hence, with all these optimist conditions in mind experts started concluding that
Abu Dhabi’s GDP Abu Dhabi's real GDP is projected to quadruple to US$315 billion by 2025.
This glorious trend for Abu Dhabi was relatively short lived as in the last quarter of 2008 oil
prices fell sharply. Since September 2008 till December 2008 oil prices had declined by 42.39%.
The main reason for this negative trend in the oil market was the US financial and Subprime
mortgage crises. The crises gave birth to a global recession and affected most the Europe and
Japan, which also, along with US, decreased the demand for UAE’s, and hence Abu Dhabi’s oil.
However, it was assumed that after having earned as much as $100 bn from the high oil prices,
Abu Dhabi economy would easily survive the low oil prices as it had sufficient funds for the
development projects too.

This was not the end of the story for Abu Dhabi; there was more in stock for Abu Dhabi than it
had already suffered. The later setbacks which Abu Dhabi suffered were because of its
neighboring emirate; Dubai. In November 2009, the major investment arm of Dubai; Dubai
world, announced its inability to pay back its debts amounting to as much as $60 bn. Hence, a
request was placed for the postponement of debt repayments till 6 months. This announcement
shook investor’s confidence throughout UAE and adversely affected the economic environment
of the emirates. There were several effects. Firstly, Moody’s Investor Service decided to
downgrade the ratings of many UAE government backed companies. For instance, Moody’s has
downgraded the bonds issued by Dubai’s six government-controlled companies to junk status.
These include the Dubai World subsidiary DP World; the Dubai Electricity and Water Authority;
the Jebel Ali Free Zone; the Dubai Holding Commercial Operations Group; Emaar Properties,
which built the Burj Dubai, the world’s tallest skyscraper; and DIFC Investments. Apart from
Dubai, Abu Dhabi also suffered the brunt of Moody’s skepticism i.e. as at 20th December 2009,
Moody’s also put some Abu Dhabi’s state backed companies for a possible downgrade of
ratings. These organizations are namely: Abu Dhabi National Energy, known as TAQA;
Mubadala Development; Tourism Development and Investment; International Petroleum
Investment; Emirates Telecommunications; Dolphin Energy; and Aldar Properties. This was
done despite of sound financial position of UAE and its possession oil reserves.

Following such events and announcement by the Dubai World, investors in the Abu Dhabi
securities market started selling the securities. On 30th November 2009, after a four-hour trading
session, the Abu Dhabi Securities Exchange closed 8.31% lower – the worst decline in its
history. The National Bank of Abu Dhabi tumbled by 9.7%, amid fears that the region's banking
sector will suffer major damage. This trend can be observed with the help of the following
figure; Fig. B.

Fig. B

Another major setback which Abu Dhabi had to suffer was due to mistake or rather incorrect
future assessment on part of its institutional investor ADIA (Abu Dhabi Investment
Authority). ADIA is the second largest institutional investor and the largest sovereign fund in
the world. In 2007, ADIA struck a deal with the New York banking group; Citigroup, to buy
its mandatory convertible bonds. The decision of ADIA had several motives behind it i.e.
ADIA had to invest its oil generated wealth to earn a decent return on it, and on the brink of
the mortgage crises, and falling share prices of Citibank, ADIA could look for no better
alternative. These mandatory convertible bonds were to be converted after 2 years from
March 2010 to September 2011 into common stocks in 4 stages, subject to adjustment. The
lowest share price at which the bonds will be later converted was fixed earlier at $31.83.
ADIA at that point estimated that the share prices will rise modestly instead of falling.
However, later the share prices fell to as low as $4.06. This came as a setback to ADIA as it
had already fixed the conversion price of bonds at seven times high the present value of
$4.06.
Here we considered some of the problems faced by one of the major emirates of UAE. We
also reviewed and studied in detail how relevant significant conditions in the rest of the
world as well as in other parts of UAE affected Abu Dhabi. In the other sections we will
review how these and the other factors affect other region.