Dubai sneezes, world markets catch cold
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The debt crisis has put a halt on the six-year boom in the Emirate’s real estate sector
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‘The slowdown will never dampen the mettle of children of Dubai to steam forward in the drive toward development.’
— PHOTO: AP
RUDE SHOCK: Work apace on a bridge construction site in Dubai, United Arab Emirates. European stock markets rebounded last Friday after Wall Street didn’t fall as much as feared on the news that Dubai was having trouble handling its debt.
A tiny Dubai sneezes, the world markets catch cold. The global markets, which were expecting a recovery in recent months, got a rude shock when it came to know that state-owned Dubai World and its real estate subsidiary Nakheel were in deep debt trap. This is an example of how a cover-up — non transparency — of financial matters could rattle world markets.
In the U.S., Standard & Poor’s 500 index fell by 1.7 per cent on Friday to 1091.49. The Dow Jones U.S. Real Estate Index, among the U.S. stock market indices, fell 2.9 per cent, nearly twice the decline of broader U.S. market indices.
Back home, on a week-on-week basis, the BSE Sensex lost 390 points or about 2.3 per cent to close at 16632.01. The global markets moved in a similar way with an overall weak sentiment.
When the debt trap of a small state of the United Arab Emirates (UAE) was exposed, Dubai was badly known to a debt of $80 billion and possibly even more. This has put a halt on a six-year boom (bubble) in the Emirate’s real estate sector.
Close ties
Early this month, Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum told its critics to “shut up” and also asked them to “do their homework”, while addressing an investment conference organised by Bank of America Merrill Lynch in Dubai. Sheikh Mohammed, who is also the Prime Minister and Vice-President of the UAE, while stressing the close ties between Dubai and Abu Dhabi — Dubai drew a $10 billion emergency loan from the UAE central bank recently — said “I just want to tell these people who nag about Dubai and Abu Dhabi to shut up.” Abu Dhabi is the capital of UAE, which includes seven emirates, including Dubai. However, it was a well known fact that the oil-rich Abu Dhabi would never tolerate a phenomenon that any other Emirates growing politically or financially powerful than it.
Sheikh Mohammed also attacked the critics who said Dubai was slow to react to the global financial crisis. He said his government “preferred to wait rather than rushing." He also told the world that he was confident that the worst of the crisis (financial) was over. “As the global economy stabilises, Dubai today is well placed to exploit its inherent strength,” said Sheikh Mohammed, adding, “The slowdown will never dampen the mettle of children of Dubai to steam forward in the drive toward development.”
At the end of November, Dubai emerged with a debt crisis of about $80 billion with an option for restructuring it.
World markets tumbled in the aftermath of the emergence of Dubai’s debt crisis, following which business confidence around the world deteriorated. The U.S. dollar also strengthened against a basket of global currencies in the last couple of days. This trend is likely to continue in the short-term and in turn, put pressure on equity markets.
The global financial system got rattled with the emergence of sub-prime (related to real estate market) issues in the U.S., more than a year back. This had also led to the fall of many investment banks and other financial institutions in the U.S. and other parts of the world.
Around this time, though many sceptics pointed their fingers at Dubai, which almost became a conglomerate of real estate companies, it refused to accept the reality and repeatedly pronounced its ambition to become the world’s financial centre with lot of funds pouring into real estate, including housing.
In the last few years, rich people around the world bought houses and offices in Dubai. Some sold their houses elsewhere to buy a flat in Dubai.
Many Indians channelled their ill-gotten money to Dubai to purchase properties. But it was unaffordable to buy or stay in a rented premise for a common working person in Dubai. Most of the Indians as well as other expatriates spent their income to pay huge rents to survive in the second largest emirate in the UAE.
While the Sheikh and his men were selling Dubai to the world, it was developing serious problems but made little progress to resolve it or even failed to acknowledge it.
Meanwhile, discontent was brewing up in the Sheikhdom. The Dubai ruler fired two of his trouble-shooters: Finance Minister Nasser al Shaikh, who worked tirelessly to resolve the financial problems faced by some Dubai-based companies, early this year; and lately Omar bin Sulaiman, Governor of the Dubai International Financial Centre (DIFC), early this month. The DIFC is an onshore hub for global finance, ambitiously developed by the Dubai Government to attract investments from the world over.
Interestingly, the DIFC organised a day-long seminar, its first in India, in cooperation with the Federation of Indian Chambers of Commerce and Industry (FICCI) at end-October, which was also attended by Mr. Sulaiman. When the credit crunch started gripping the real estate scene of Dubai, the Government of Dubai was scouting around the world for new investments or partnerships.
Opportunity
Entitled “The India-UAE partnership: investments, opportunities and synergies”, the seminar’s keynote speeches and panel discussions examined how Indian companies can tap into Gulf liquidity and the role played by the DIFC as a gateway to international capital and financial services resources. Deeper banking and finance service links between the UAE and India also were discussed, as were ways to promote cooperation between UAE and Indian business communities.
In his keynote address, Kamal Nath, Union Minister of Road Transport and Highways, said: “We (India and the UAE) have the foundation of centuries of history and now we have the opportunity to benefit from the future together. DIFC’s expertise will help us benefit from the opportunity of attracting long-term funding to our infrastructure projects.” Mr. Kamal Nath too failed to do his “home work” as suggested by the Dubai ruler, Shiekh Mohammed.
Rating
The international rating agency, Standard & Poor’s, downgraded its ratings on several Dubai government-related entities last Wednesday.
“In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (which was not rated) to provide timely financial support to a core government-related entity,” S&P said.
The rating agency lowered its rating on DIFC Investments LLC by four notches to BBB-minus, or one notch above junk status. It lowered its ratings on DP World Ltd, one of the largest marine terminal operators in the world and Jebel Ali Fee Zone by two notches each to BBB-minus and lowered Dubai Holding Commercial Operations Group LLC by two notches to BBB-plus.
S&P cut the rating of Emaar Properties by two notches to BBB-minus. It left Dubai Multi Commodities Centre Authority and Thor Asset Purchase (Cayman) Ltd at BB, or two notches into junk and placed their ratings on review for a possible downgrade.
This is a crude shock for Dubai.
OOMMEN A. NINAN
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