Just three days before Eid, the Dubai government's announcement seeking a
six-month reprieve on debt repayments sent shockwaves through the world
markets, as it raised doubts over the Gulf emirate's ability to meet its
financial obligations.
Global markets, which have yet to come out of the financial crisis that
savaged many an economy, reacted sharply and sank like a rock. Analysts
now wonder whether they are witnessing the beginning of the biggest
sovereign default since Argentina in 2001.
Questions are also being raised on Dubai's status as a major destination
for international investment.
What happened was that the Dubai government requested the creditors of
Dubai World (one of three conglomerates that are backed by the emirate),
to agree to a 'standstill' on repayments until May 30 2010.
The standstill also applies to the $4.05 billion sukuk, or Islamic bond,
issued by Nakheel, the state-owned builder famous for the spectacular Palm
Jumeirah scheme and other such mind boggling projects that involve
large-scale land reclamation. Nakheel's parent company is Dubai World.
The truth is that Dubai is being crushed under a mountain of debt. The
emirate has chalked up debt in excess of $80 billion by expanding in
banking, real estate and transportation. Dubai World with $60 billion
liabilities has sought a six-month standstill on its debt repayment to all
its lenders.
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The emirate borrowed $80 billion in a four-year construction boom that
transformed Dubai into a glittering jewel in the middle of the Gulf region
and also into a tourism and financial hotspot.
Dubai's sovereign credit default swap has surged 1.11 per cent to 4.29 per
cent, leading to global rating agency Standard & Poor's placing the
ratings of four Dubai-based banks on negative outlook due to their
exposure to Dubai World.
The debt itself might not seem too high, but the uncertainty surrounding
the entire issue has spooked financier. Investor confidence the world over
has been shaken up badly, as many wonder if the world would slip into
another recessionary phase, given that there are some other nations in a
similar situation as Dubai: Greece, Iceland, Hungary being just a few of
them. Many nations that are following Dubai's development pattern are
inviting trouble, said analysts. Economists fear that they might have been
too hasty in predicting that the global financial crisis had ended.
The Dubai shock was as severe as it was sudden. Just a few weeks ago,
Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum, had assured all that
the emirate's financial condition was all right, saying that it would
raise more funds to meet its financial commitments and would be more
cautious.
As is normally the case in autocratic regimes like Dubai, no one knew what
the real situation was till it was too late. Analysts feel that either the
ruler was unaware of the magnitude of the problem or his advisors asked
him to keep it under the wraps.
'The Sun Never Sets on Dubai World' is the corporate slogan of Dubai
World. However, that may no longer hold true.
The proposal by the Dubai World, a state controlled enterprise, to
restructure its debt portfolio has taken the markets by surprise and is
being viewed as a prospective quasi-sovereign default. It appears that
debt restricting will go through, at least partially with the GCC based
banks, but one has to wait and watch as to how the international banks
will respond to this offer.
The general expectation is that the Government of UAE will come out with a
strong intent / statement of support for Dubai and its related business,
which can then arrest the possible sell off that one can expect before the
markets open on Monday.
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With Dubai World teetering on the brink of collapse, those who had
invested heavily into the emirate believed that the conglomerate' s bankers
would extend it more loans to bail it out rather than let is reputation be
dented.
However, with neither the bankers nor the emirate itself making any such
supportive moves, it became clear that the emirate was in big trouble and
it might be a while before it extricates itself from the morass.
Dubai also does not have the oil reserves, like its neighbours in the
Persian Gulf, to help it tide over its financial woes.
The moment the truth dawned upon the markets, a chain of events unfolded:
gossip spread through the world like wildfire hitting the emirate's
property prices, credit rating agencies downgraded all Dubai
government-related debt, billions of dollars were lost by investors as the
value of their investments in the Gulf emirate plummeted, oil prices began
to fall, some currencies saw a steep slide, and the stock markets the
world over were revisited by that all-too-familiar sinking feeling.
Billions of dollars of investor wealth was wiped out before anyone could
blink.
Dubai saw property prices falling by almost 50 per cent from their 2008
peak. The property bubble had already begun to burst, but with this latest
shock real estate will be devalued even more.
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The magnificent complexes built by Dubai's developers have turned this
land of sand in to a global playground for the rich and mighty. Everyone
who is someone globally has poured money into the extraordinary and lavish
developments in Dubai.
The remarkable Palm Jumeirah, man-made islands reclaimed from and
enveloped by the sea, boasts of a global who's who as its investors.
Owners of these exclusive and expensive villas include the likes of
Bollywood megastar Shah Rukh Khan, footballer David Beckham, Hollywood
heartthrobs Brad Pitt and Denzel Washington, Afghan President Hamid
Karzai, super model Naomi Campbell, and many shipping magnates, oil
barons, and tech billionaires.
Dubai had raised $10 billion from Abu Dhabi, its wealthier neighbour, in
February. And hours before it requested a standstill, it said it had
raised another $5 billion from two Abu Dhabi banks, although only a
portion of that was available immediately.
Unlike Abu Dhabi, Dubai has to borrow to finance its future. As the
recovery takes hold, it will make money again from its property, tourism,
trade and financial industries.
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