The global market is rattled by the debt crisis of Dubai. So what happened and what are the consequences? Dubai, a city-state, is one of the emirates of the United Arab Emirates. Dubai does not have oil like that of the other emirates and hence followed on a principle of making Dubai a middle-eastern Las Vegas. The Dubai government followed the idea of making Dubai a financial hub and a high-class tourism center in the oil-rich region. One of the steps followed by the Dubai government to achieve this was to set up an investment firm, "Dubai World", which raised capital through foreign investors who saw the potential of Dubai and its grand ideas in the oil rich region. This idea actually worked out pretty well and the evidence of this is the skyscrapers and the business activities that go into these buildings. Dubai, as it planned, became a famous tourist destination for wealthy westerners and others. And as Dubai World appeared to become successful, it played a key role in many development projects in both developed and developing economies.
But when the credit crisis struck last year, I was expecting Dubai to be one of the first state to get severely hurt. Dubai has always planned its grand ideas through foreign money and I was expecting the foreign money to dry up in a rapid pace than what appears to have actually happened. As of this date, Dubai has an external debt of 103% of GDP. Dubai has around $80 billion in loan and Dubai World which is a government subsidiary has $59 billion in liabilities that it owes to its lenders. And Dubai World has asked the lenders to agree to a standstill agreement which would allow Dubai World, which is in the process of re-structuring itself, to delay its loan payments to its creditors. This has shocked the world market and we are waiting for a more appropriate response from the markets this week which were in a holiday week. I am very confident that Abu Dhabi, which is an oil rich emirate, would bail out Dubai and would keep Dubai running. But the handling of this debt crisis by the Dubai government has made me think if the foreign investors would still think Dubai to be a safer investment place. And this comes at a very bad time for the global economy. There is already a severe credit-crunch in the world and this debt situation only worsens the credit and money flow in the economies.
We still don't have a very clear idea about the exposure of Asian and Western banks to Dubai. I am especially worried about the Asian banks exposure because with credit flow remaining worse in the western economies, its the Asian customers and businesses who are expected to pull the world out of global recession. Especially through exports to the Asian countries, I expect a pick up in credit flow to western businesses by western financial companies since I feel that the western governments have not done everything that they should have done to increase demand and credit flow.
As of now, we have the data of exposure of the following banks to Dubai: RBS - arranged $2.3 billion in loans for the Dubai World. HSBC - has the largest exposure in UAE with around $17 billion of loans in just 2008. Abu Dhabi Commercial bank, PJSC, which is a lender and a book runner, has around $1.9 billion exposure. British banks have a combined $49.5 billions of loan outstanding in UAE. Bank of Baroda, an Indian bank with state support has around $1 billion of exposure in the region.
If more Asian banks reveal their exposure in the coming days, then this would cause a run in Asian investments by foreign investors. This would severely hurt developing economies although the pain might look less severe at the beginning. Asian banks and financial institutions trying to raise capital for a variety of Asian acquisitions of foreign firms, which is very essential for a strong demand and credit flow, will be hurt and this might cause a slump in the already weak global economy and prevent various successful implementations of much needed programs, like the UN food aid program which is already in a worse situation due to the global economic crisis.
I sincerely hope that Abu Dhabi comes with enough money in its pocket to bring a confidence in the minds of global investors on Dubai and this rescue of Dubai should definitely be done in a grand manner, by which i mean that investors get the confidence back on Dubai. This should also be done at a very short time-frame without dragging the rescue process, if one is needed.
Dubai has built sufficient infrastructure for it to continue as same old Dubai if it somehow becomes successful in getting confidence into the global investors' minds and keeps foreign money flowing into it.
