Friday, November 27, 2009

Dubai spoils holiday mood

My Grandfather rode a camel.
My father rode a camel.
I am riding Ferrari, Benz and BMW but I am also riding on the bonds that people in the west fear of becoming a junk.
Would my son also ride a camel ?

One such comment by a reader on the news of Dubai Government seeking a six month standstill for Dubai World on it's payment due this month, sums up the feelings of those who have lost their money on speculative investment in Dubai. Dubai world is the economic might of Dubai and includes DP World, that operates global ports, Nakheel the property developer behind iconic projects such as The Palm Islands and The World.
Dubai has the worst debt per capita in the world and is always portrayed as one end of the credit crunch spectrum. A year ago, economic commentators and analysts were harsh on Dubai's economic revival hopes. But all along, Dubai Govt defied those postures and managed to stay afloat. Big brother Abu Dhabi came to her rescue including the last week’s subscription of 5 Billion dollar bond by two of their bankers. Everything seemed so well for Dubai with a visit of Sheikh Makhtoom to UK and getting accolades from UK Prime Minister Gordan Brown for managing debt crisis with astuteness. But within few days, nobody imagined that Dubai Govt would send ripples among global investment community. Most intriguing part is the timing of the announcement. It comes when middle east is closed for Haj Holidays, US for thanksgiving and rest of the markets over the weekend.

It's interesting to read various articles drawing the comparison between Dubai's default with Argentina Crisis in 2001 and also with the collapse of Lehman brothers. But the big difference is that Dubai has the backing of Abu Dhabi. Abu Dhabi has multi-fold of investments than Dubai's liabilities . But why didn't they come to Dubai's rescue this time ?

There is another alarming factor in Dubai's debt pattern. Out of 80 Billion dollar debt, nearly 60 Billion comes from Dubai World. What would be the spin off of this on Dubai economy ? If various mega projects like Dubai Burj (Tallest buildings) and 'The World' don't go ahead, interest cost would mount without any returns. Construction activity would be severely affected thereby impacting Dubai work force and its GDP. Dubai Trading mainly revolves around infrastructure goods, commodities and tourism. If first two gets affected, third would have some impact despite having an ace of ' Emirates Airlines'. Would it be a cascading effect or within next few months a new formula be worked out that will save the face of the Dubai , perhaps at a political price they may have to pay.

HSBC, Standard Chartered , RBS and Barclays have the maximum exposure with Dubai and so also various individuals from Asian subcontinent. They all would be anxious to see how things unfold when stock market resumes next week. I would be keen to know if Dubai property prices take further nosedive from the 50% beating they took last year ? Dubai World proclaims ‘ The Sun Never Sets on Dubai World ‘ and Nakheel ‘ Where Vision Inspires Humanity’. Would Dubai Sun be back after cloud of fiscal uncertainty and her vision would continue on its growth path ?

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