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Dubai facing long term damage over debt worries
Laos News.Net
Friday 27th November, 2009
Fears over Dubai's debt situation and how it may affect the global economic recovery are no doubt overblown.
The emirate's entire government debt is $80 billion, and the portion subject to the current moratorium amounts to $59 billion, well short of the trillions of dollars written off since the onset of the global financial crunch. Numerous other companies, and in particular financial institutons, have received bail-out funds of hundreds of billions of dollars.
Money worries of companies such as General Motors and Chrysler, and major European banks including Fortis and ING, and the UK's Royal Bank of Scotland, dwarf those of Dubai which still houses one of the world's most vibrant and growth-oriented economies. Dubai is also backed by the hugely wealthy Abu Dhabi emirate and the UAE Federal Government. Indeed the country's central bank earlier this year took up a $10 billion bond issue from the beleagured emirate, and offered to take up more.
Government authorities in Dubai on Friday were playing down fears of an outright default saying it was in the long term interest of Dubai World to restructure the conglomerate and its debt. They say they acted in full knowledge of how the markets would react.
While this latest development will be digested by global markets, as a hiccup in the recovery underway, the impact in the Gulf is likely to be more long-lasting. Dubai in particular will be particularly impacted.
In recent weeks confidence had returned to Dubai and its neighbours after a near-paralysis of real-estate markets which have come to dominate the local economies. Major banks in Dubai and Abu Dhabi, and across the Gulf have been successfully issuing bonds, while the Dubai government itself on Wednesday raised $5 billion from two Abu Dhabi banks.
Soon after the announcement of the debt moratorium however the prices of all Gulf bonds plummeted. Ironically Dubai's decision to postpone repayment of its debt so it can restructure, may well have seriously damaged its capacity to restructure - at least on terms as favorable as those prevailing prior to the announcement.
There is little doubt too the decision has seriously damaged the credit-raising prospects for Gulf governments, banks and enterprises.
It will also affect Gulf banks' abilities to garner deposits. For most of this year UAE and other states' banks have been struggling to bring in sufficient deposits to match their outstanding loan balances. Most Gulf countries have their currencies pegged to the U.S. dollar which is presently tied to short-term interest rates below 1%. Gulf countries however have had to offer yields of around 5% to 6% to attract funds. This has stimulated a lot of activity in the U.S. dollar carry-trade, where investors have borrowed in U.S. dollars to invest in Gulf bonds to pick up an interest arbitrage of around 5% without any foreign exhange risk. The interest difference may have provided a good investment potential, however those investors engaging in such trasnactions are now facing losses on their principal as the prices of those debt instruments have fallen, and are unlikely to recover any time soon.
The Dubai property market, which had been recovering markedly in recent months and weeks, will be seriously impacted by the Dubai World decision. The ability of developers and indeed banks to raise funds for real estate projects has been seriously impaired. Even investors and home buyers who had been seeing a freeing up of finance for purchases, will now face more stringent lending conditions.
There is no doubt the decision to announce a debt moratorium has caused significant concern and will have far-reaching consequences in the Gulf, and in Dubai in particular. The emirate has had plenty of time to get its house in order, and should have done so rather than having to call on its creditors to carry it through. Support should have been sought from Abu Dhabi and some of its wealthy neighbours instead. It would have been a good investment on their part to secure the economic future of the Gulf. It appears however, they didn't have the opportunity. Like the financial markets, other Gulf countries were caught unawares. In any event the damage is now done.  Email this story to a friend
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