Dubai debt crisis

When it came the fall was hard and fast. After the Eid holiday, this was the first opportunity investors here had to make their feelings known. And that they did.

Foreign investors, it seems, were the ones pulling out their money. Locals were choosing to sit out the storm.

But whilst the falls were severe, it wasn't the bloodbath that had been expected. Some analysts had predicted that a 10% fall was all but inevitable.

And so there is some comfort that the losses weren't as steep, but there's still unease. The biggest concern here is what this does to Dubai's international reputation. Investors have left. Will they ever come back?
Courtesy: Situation Analysis By Ben Thompson

What went wrong in Dubai?

Dubai does not have the enormous oil wealth enjoyed by its neighbours such as Abu Dhabi. Its main source of wealth has historically been as a port.

In recent years it has sought to make money from property development and luxury tourism, building impressive hotels such as the Burj al-Arab.

The global downturn left many financial workers unemployed. The population fell an estimated 17%, meaning there was little demand for new properties.

There was also less demand for luxury holidays. Dubai companies have borrowed money to fund huge building projects such as "The World" and are now unable to repay it.

There are jitters on financial markets about who lent all the money. European banks are estimated to have lent more than £50bn to the whole of the United Arab Emirates.

Dubai state-backed companies may also have to sell-off some of their assets overseas such as luxury property in London and the Turnberry golf course in Scotland.


Dubai shares plunge as debt crisis fears continue 

The main stock markets in Dubai and Abu Dhabi have closed sharply lower.

Abu Dhabi saw a record one-day fall of 8.3%, while Dubai's Financial Market Index lost 7.3% - the biggest decline since October 2008.

Shares traded in the region for the first time since the state-owned property company Dubai World asked for an extension on repaying its debts.

Dubai's finance minister, Abdulrahman al-Saleh, said the government was not responsible for Dubai World's debt.

"Creditors need to take part of the responsibility for their decision to lend to the companies... they think Dubai World is part of the government, which is not correct," he told Dubai Television.

Earlier, Dubai's property developer, Nakheel, had asked for trading of some of its Islamic bonds to be suspended.

The central bank of the United Arab Emirates (UAE) said on Sunday it would provide banks with extra liquidity.

European markets were trading slightly lower. The UK's FTSE 100 was down 0.7%, Germany's Dax fell 0.7% and France's Cac 40 slid 1.3%.

Banks fell more sharply - in the UK, RBS was down 4.6% while Lloyds shed 5.7%.

On the Dubai bourse, construction and financial stocks slumped nearly 10%. The debt-ridden Dubai World fell 15%.

"This was expected because markets have panicked over exaggerated reports in the Western media," Hamam al-Shamaa from Al-Fajr Securities said.

He added that many foreign investors were withdrawing from the market and that tomorrow would probably be a similar day.


World reaction

While shares in the Middle East dropped sharply, Asian shares rebounded on Monday on hopes the Dubai debt crisis will not spread to other financial markets after the UAE central bank decision.

Asian markets closed before the announcement that Nakheel had asked to suspend some of its bonds.

Banks such as Mizuho Financial and Mitsubishi UFJ Financial Group in Tokyo, and HSBC and Standard Chartered in Hong Kong led the rally.

Tokyo's Nikkei 225 index rose 2.9%, while Hong Kong's Hang Seng gained 3.6% and stocks in Shanghai rose 2.5%.

Shares in Samsung C&T, builder of the Burj tower in Dubai that will be the world's tallest when completed, gained nearly 5%.

The yen rose against the dollar after the announcement from Nakheel, paring earlier declines.

The South Korean won also gained after the finance ministry said its banks had "limited" exposure to Dubai debt.

Crude oil rose by 1% to more than $76 a barrel, after the benchmark commodity slid last week on fears over Dubai's financial health.


Bank assistance

On Sunday, the central bank of the United Arab Emirates (UAE) said it was setting up a facility to provide banks with extra liquidity.

The liquidity will be available to all UAE banks as well as foreign banks operating in the Emirates.

The bank added that the banking system in the UAE was more sound and liquid than a year ago.

That came after Wednesday's announcement from Dubai World asking for a suspension on its debt repayments, which sent world stock markets tumbling.

Meanwhile, neighbouring Abu Dhabi has said it will "pick and choose" how to assist Dubai.

"We will look at Dubai's commitments and approach them on a case-by-case basis," an Abu Dhabi government official said on Saturday.

"It does not mean that Abu Dhabi will underwrite all of their debts," he added.

Paying the price

The BBC's economics editor Stephanie Flanders said the situation in Dubai had alerted investors to the idea that you can lose money on government bonds - even if they appear to have implicit guarantees.

The repercussions of Dubai's debt crisis is already making it more expensive for countries with large deficits to sell their debt.

"There are lots of other governments out there who don't have rich neighbours with oil to bail them out, who may have trouble in the next few months or years," she commented.

"Greece and Latvia are paying more for their debt, thanks to Dubai."


What do global market experts say on the Dubai debt crisis?

Adrian Mowat, Chief Asian and Emerging Equity Strategist, JP Morgan, says the Dubai debt crisis is a buying opportunity.

However, Patrick Shum of BMI Fund Management sees see further downside in markets. "In the near-term, we may see a further downside in the stock market, especially in the financial and banking sector." He feels the Dubai situation won't develop into a crisis as US and European countries will support the Dubai government.

On Wednesday, the Dubai government said it will ask creditors for a standstill on debt worth billions of dollars of two of its flagship firms --  Dubai World, which runs 49 ports around the world, and real estate developer Nakheel. Dubai World is the conglomerate which spearheaded the emirate's breakneck growth. It has USD 60 billion in liabilities and will seek a six-month standstill on its debts with all lenders. Nakheel was the builder of the famous three palm-shaped islands off the coast of Dubai.


Dubai's debt problem was known:

Mowat says holding of Dubai related debt is relatively modest in the global financial system. “People have been aware of the risks in these debts for over two years now. There is plenty of transparency on debt.” He says the cash flow problems with these entities were known for quite sometime. “Professional investors in the bond market are fully aware of the risk.”


Can the problem worsen?

Peter Canelo of Argus Institutional Partners says if Abu Dhabi does not step in then it could be a problem. "Abu Dhabi is going to come in and help fix the situation. They are going to come in and re-negotiate these loans and the terms of these loans. If Abu Dhabi does not do that, then we have a problem."


Don't worry about Dubai crisis, buy on dips: Experts

The markets slid sharply today in line with global peers due to the turmoil triggered by Dubai World's debt repayment deferral. Asian markets too closed down between 2% and 4%. However, Indian markets bucked the trend and were able to come off the day's lows, but ended in the red. The Nifty closed 62 points down while the Sensex ended with cuts of 207 points.

Infrastructure and infrastructure finance stocks were the biggest losers today as a result of that Dubai panic. One sector that held out today was the defensive pharma sector.

The market breadth was abysmal for most of the day today, closing with five declining stocks for every advancing stock on the NSE. Despite being the first day of a new F&O series, volumes were quite heavy with about 120,000 crores being clocked in trade

Investors who have a waiting period of six months or more can look to invest in markets. "I still remain cautious on the market. There is a steep food price inflation. If you look back in time be it 1990-1991, 1997-1998, 1999, or 2007, you will se a dip in equity markets. Typically, these dips are very vicious. Retail participants may see the markets at mouthwatering levels still do not have free cash to support the market. So, you will see very sharp declines during these times. Mercifully, these sharp declines tend to be brief. The rallies that follow tend to be fairly steep thereafter. If you were to buy closer to 4,700, the downside pain from there is substantially limited."   
Condensed from: Vijay Bhambwani

Ajay Loganadan, Head - Investment Advisory Group, HSBC Private Banking, too is not perturbed by the happenings overseas. "If any, it might impact global flows over the near-term into emerging markets and India." He sees the markets finding support over the near-term and advises long-term investors to use any sort of dip as a buying opportunity.

Likewise, SP Tulsian of sptulsin too does not see a major impact of the Dubai spillover on Indian markets. He sees a mild negative impact on banking stock and a more severe impact on realty stocks. 

Sectors to look at now:

Loganadan is bullish on the sugar space. "Fundamentally, there is very clear demand-supply mismatch. It is a cyclical business and we get into this cycle once every three or four years. Sugar companies should be able to command reasonable margins in the next 12-18 months. Right now, given the valuations and outlook for the next 12-18 months, we are overweight on sugar."


Dubai debt risk as crisis rocks Gulf banks

The US rating agency Moody's has warned that Dubai faces a "systemic increase in debt" after borrowing abroad on a huge scale to fund its construction boom, raising the risk of a financing crunch unless richer neighbours in the United Arab Emirates offer support


Courtesy: Ambrose Evans-Pritchard

Dubai has relied on international borrowing to drive its breakneck expansion, pushing its debts to well over 100pc of GDP. The picture is now darkening fast as crude oil futures start to price in a protracted downturn across the Gulf region.

The Emirates rushed through a guarantee of all bank deposits over the weekend to forestall a wave of withdrawls from smaller lenders.

Neighbouring Qatar said yesterday that it was injecting up to $6bn in fresh capital into its banking system to restore confidence, suggesting that the gas-rich state may not be in a position to provide yet more captial for Western banks. Barclays raised £2bn from Qatar as recently as June.

Moody's said it is hard to assess the contingent liabilities of Dubai because the operations of the booming city-state are less than transparent, but it has identified $47bn (£27bn) in debts accumulated by state-linked companies.

The sheikdom, ruled by the horse-loving Makhtoum family, has staked its future on plans to become the tourist, transport, and finance hub of the Middle East, encouraging outsiders to buy apartments in the plethora of new tower blocks sprouting like poplars across the sand. Citigroup warned last week that a number of Dubai developers have been caught in a severe squeeze, with a growing risk that projects may not be finished.

Moody's said the relentless rise in leverage raised through state firms may leave Dubai exposed to "financing and geo-political risks".

Abu Dhabi, the big brother of the UAE group, controls the world's biggest wealth fund with an estimated worth some $900bn. However, it is not entirely clear whether Abu Dhabi would feel itself obliged to bail out Dubai if that were ever necessary.