dubai debt crisis (2)

8/8/2019 Dubai Debt Crisis (2)

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AN INTRODUCTION


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Dubai embarked on the growth trainafter the discovery of oil in 1966. In 1966the city has the population of only 58000

and it increased over the period of timeto 1.5 million. Out of total population80% are expatriates.The citys rapid growth is the vision ofruler Sheikh Mohammad bin Rashid al-Maktoum. He outlined his Vision in thebook My Vision. Dubai model became

the envy of the neighbor.


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Dubai's gross domestic product as of 2005was US$37 billion. Although Dubai'seconomy was built on the back of the oilindustry, revenues from oil and naturalgas currently account for less than 6% ofthe emirate's revenues.It is estimated that

Dubai produces 240,000 barrels of oil a dayand substantial quantities of gas fromoffshore fields. The emirate's share inUAE's gas revenues is


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about 2%.

Dubai's oil reserves have diminishedsignificantly and are expected to beexhausted in 20 years. Property andconstruction (22.6%),trade ( 16%), entrept (15%) and financial services (11%) are

the largest contributors to Dubai'seconomy.


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The Dubai Financial Market (DFM) wasestablished in March 2000 as a

secondary market for trading securitiesand bonds, both local and foreign. As offourth quarter 2006, its trading volumestood at about 400 billion shares, worth

US$ 95 billion in total. The DFM had a market capitalisation

of about US$ 87 billion


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Dubai World is the company whichmanages the Dubai government'sinvestments. In 2009, the company's debtpayments were placed on a standstill,causing a major financial issue.

Dubai World was established under adecree ratified on 2 March 2006 by Sheikh

Mohammed bin Rashid Al Maktoum, VicePresident and Prime Minister of theUnited Arab Emirates and Ruler of Dubai.He also holds the majority stake in Dubai

World.


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On 2 July 2006, it was launched as aholding company with more than 50,000employees in over 100 cities around the

globe. The group now has extensive realestate investments in the United States,the United Kingdom and South Africa.Dubai World made headlines in March2008 after its chairman, Sultan Ahmedbin Sulayem, threatened to take thefund's money out of Europe Dubai


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World's threats came shortly afterthe European Unionattempted to

lay out "a set of principles fortransparency, predictability andaccountability" for sovereign

wealth funds.


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The real estate big boom began in 1999when property market was opened toinvestors from outside the Gulf Co-operation Council countries. Propertiesprices kept on increasing at breath neckingpace. Speculative money moved in and

drove the price beyond normal peoplereach. Higher prices ensured more supplyof real estate and Oasis started to becomea mirage for the normal people.


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The dream run crashed when the GlobalEconomy went tumbling down due tosubprime crisis. The real estate in

Dubai crashed most in the world bymore than 50%. The servicing of debtbecame difficult as there was credit

freeze across the world and it becamedifficult to sell the properties.


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In a journey to become world flashy citystate owned companies accumulated

debt of over $80 billion. The debt is126% of the GDP of Dubai. Of thisstaggering amount of debt Dubai World

the state owned company has $60billion of debt.Worlds top bank has exposure in theshort term paper of the Dubai World.


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So any sort of default is sure to sendtremor to the fragile financial market.Friday fall was because of the delayingthe date of repayment of $3.5 billionsukuk bond that is due on 14thDecember, 2009.The bond was issued

by Nakheel a branch of Dubai World.The announcement irritated the investorand they triggered the panic button.


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Dubai Company has $13.1 billion of debt thatis due for payment in 2010 and around $47billion of debt that is due before 2013. The

companies should either increase theirprofitability to pay off or arrange to refinancethe debt. Second option is more likely but thequestion arises who will buy these debts.

Anyone who goes for shopping this hugedebt will be either selective in picking or willlay very restrictive terms and condition.


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Earlier this year UAE central bank hasgiven around $10 billion of credit toDubai. S&P analyst tracking the region

is of the view that only $3-4 billion isleft out of $10 billion credit, so thegoing cannot be easy for the Dubai.

Abu Dhabi which the wealthiestemirates in the UAE is an hour drivefrom Dubai has around $800 billion ofsurplus. So if Abu Dhabi comes to the

rescue things could be easy for Dubai


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but Abu Dhabi will prove to be toughestlender.One option may be Abu Dhabi taking stake

in Dubai crown jewel companies likeEmirates Airlines, Port operator DP worldand Dubai Aluminum.


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The crisis began when investor ofNakheel a real estate developer flagshipof Dubai World considering deferringthe payment of Islamic bond sukuk

that is to come up for payment on 14thDecember. This irritated the investorsand they pressed the panic button. The

crisis in Dubai triggered sell off acrossthe world. Equity and commoditymarket plunged by more than 3% in Asiathough European market saw selling


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pressure in the beginning but laterrecovered. It seems that the dream runof Dubai has come to an end. Nowthings happening in Dubai will be moreon realistic front. But as long as theSuadi Arabia and Iran having stricter

rules and regulation city Dubai willagain come out of woods and start itsdream run as the people from these

region will seek pleasure in Dubai.


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Total Dubai World debt: US$60billiontotal:

Due debt: US$3.5billion Sekuk bonddue 14 December 2009:

DP World [profitable ports company]debt: US$15billion not in default:Dubai World problem [actually orpotentially non performing] debt:

About US$25billion:


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Gulf region is the fastest growing region in theworld in terms of economics and businessopportunities. And because of oil resources, the

demand of which will not go down for years tocome, the government can continue to fund theprojects and organizations to avoid collapse.

.


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So this is really a roller coaster ride.There will be ups and downs over the

next few years. Plenty of people willmake and lose money in the process.But overall some research reportsshows a very bright future for this

region, simply because of the financialbacking the government has in the formof oil, which they can use to support

themselves for a long time.


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THANK YOU

dubai debt crisis (2)

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