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Thursday’s surprise news of a possible default by Dubai World shocked the financial world and caused stock markets to tumble amid concerns about the effect on the stability of the global financial system.
Dubai government’s announcement it was seeking a six month delay on debt repayments of state-owned Dubai World – the flagship conglomerate behind Dubai’s rapid expansion and extravagant property developments – caught investors by surprise. Dubai World’s $60 billion debt represents a massive portion of Dubai’s total debt of $80 billion.
Speculation about a potential sovereign default sparked a sell-off in global equities, high-yield corporate bonds and commodities, while the US dollar and Japanese yen surged in a flight to safety move.
Credit rating agencies slashed ratings on Dubai’s government-related debt. UAE’s federal government in Abu Dhabi, having already bailed out Dubai with $10 billion earlier this year, may yet need to provide another bailout.
Dubai’s vastly ambitious, eye-catching building projects became the poster child of the emirate’s turbo-charged expansion in recent years. Concerns about a supply and demand imbalance started being raised in the last couple of years, and – adding the global financial crisis and the disappearance of international buyers – Dubai’s property prices have tumbled by around 50% since their 2008 peak.
While US banks’ exposure to the region is thought to be limited, UK lenders have the most to lose from a crisis in the Emirates, with a combined $49.5 billion of loans outstanding. According to JPMorgan Chase, the Royal Bank of Scotland underwrote more Dubai World loans than any other institution, while HSBC has the largest capital exposure to the UAE.
While initial fears of the Dubai crisis sparking a new financial meltdown have faded, and European stock markets rebounded on Friday, the fallout has shown the continuing vulnerability of the global markets and economy.
December 10, 2009 at 12:17 am
Petra,
Nice comment, I understand the law in Dubai says that it is a criminal offence to bounce a cheque, a criminal offence that can lead to imprisonment.
History shows that those states where the law makers believe they are above the law are less enduring than those that the law makers are under the law. This will be an interesting one to watch as I understand a lot of transactions within the Dubai Business District have elected to be under English law.
Although Dubai’s Real estate uber-boom and subsequent collapse is fun for westerners to talk about, shifting focus from their own economic dependency on property values, Dubai has made some intelligent Infrastructure Investments in Ports etc and Jebel Ali Free Zone, JAFZA, is a fast growing economic zone based on tax competition whose fast pace of growth is based on attracting profitable multinationals who choose to pay less tax, this has not slowed in the world recession and seems to have a long way to go.
HM
December 12, 2009 at 4:20 am
HM, thanks for your comment. I agree that Dubai will continue to offer many benefits to international businesses and investors. However, the goal of being one of the world’s top financial centres (along with NYC, London, HK and perhaps Singapore) has been overly ambitious in my opinion. The pace of Dubai’s real estate and tourism development has also been very steep, likely more that there was demand for. Of course this is not something too unusual per se. There will be many more bubbles and subsequent collapses in the future (as there were in the past), and that doesn’t just apply to the West but also the Middle East and all emerging markets.