Middle East financial observers seem generally confident that Abu Dhabi and Dubai will thrash out a deal to rescue Dubai’s state investment vehicle Dubai World in the restructuring of its $60bn (£37bn) debt, although Abu Dhabi officials have suggested that the bail-out would most likely be on a selective basis.
One likely outcome is that Dubai World’s global investment arm Istithmar World will have to offload some of its Aladdin’s cave of investments – which include New York-based upmarket department store retailer Barneys – at knock down prices. The fund paid then owner Jones Apparel $825m (£412m) for Barneys in mid-2007, only three years after Jones had acquired the group for just $400m (£218m).
Although the direct impact of a Dubai World fire sale on the global retail industry will be quite limited, the group’s financial difficulties look likely to accelerate a slowdown in economic growth within the Emirate with repercussions for the rest of the Middle East, as business confidence and funds for construction projects continue to evaporate. As a result, retailers much closer to home may find that they need to rethink their international strategies.
John Lewis chief executive Andy Street said as recently as last week that the group regarded the Middle East as “the first place to look” for international growth opportunities. The John Lewis Partnership planned to open 20 Waitrose stores in Dubai by the end of next year.
Alliance Boots also had plans for big expansion in the country, which may have to be reined in. Similarly, US-based Office Depot revealed in January it was pinning its hopes for international growth on the Middle East, when it signed a deal with a local partner.
Nevertheless, with the region accounting for only a small proportion of sales for these retailers at present, and local regulation restricting international investors to minority stakeholdings – in fact, most players operating there have limited their involvement to franchising – exposure to a regional economic downturn would also be fairly minimal.
The most significant impact from the Dubai World affair will be the setback in confidence felt within the international financial sector. As UK banks are among the world’s most exposed to Dubai World debt, struggling UK retailers will find it that bit harder to elicit support from financial backers should the high street remain subdued in 2010, and we could see more retail businesses going to the wall as a result.