jump to navigation

Black Friday Thunder…called Dubai Crisis December 3, 2009

Posted by fredpereira in Uncategorized.

WORLD markets were on their way to regaining their recently-acquired composure as fears that the knock-on effect of the financial crisis in Dubai would lead to a double-dip global recession abated.

The Dubai debt fiasco has not only taken the sheen off the desert but it has also rattled the world financial markets. Banks, financial institutions, infrastructure and real estate companies have been hit hard and many of these have major stake in the Emirate on the brink of a financial breakdown.

It came as a shock to many, when Dubai government disclosed that it would not be able to service the 80 billion debt it has raised through Dubai World and property unit Nakheel. Government of Dubai wants the creditors to agree to a debt standstill as it restructures Dubai World and works around the finances to pay back.

Although the Dubai government has not said that it would not be able to repay the debt but the world markets took it as a huge negative signal as they are already suffering the great American financial meltdown.

Policymakers in India did not appear too concerned about the impact of Dubai’s troubles on the economy and the benchmark Sensex of the Bombay Stock Exchange pared early losses to close 1.2% lower.

Emerging markets, which have been outperforming over the past few months, bore the brunt of the sell-off, but major European stock indices rose on Friday. The Morgan Stanley Emerging Markets Index fell by 2.7% and the rupee, the Russian ruble and the South Korean won slid while the S&P 500 in the US recovered from opening 2.1% lower to trade 1.2% down at 9.30 pm IST.

While a large number of Indian corporates have said that they do not have a major exposure to Dubai but the debt crisis has proved to be a major dampener for the stock markets and has hit the sentiments hard.

Another major negative for the Indians is the huge number of Indian labour force which will be directed affected by the Dubai financial crisis. Indian infrastructure companies such as Punj Lloyd, DLF and other major realtors, however, have said that they do not have any exposure to Dubai. However, engineering major L&T and Bank of Baroda have strong presence in the Emirates but it is unlikely that they will suffer big problems due to the current situation.

Compared to corporates, individual Indians are more likely to be affected by the Dubai financial fiasco as 4.5 million Indians live and work in the Gulf region and they remit around 10 billion dollars every year to the country thus remittances would likely be hit and the worst affected would be Kerala, which has the maximum number of people working in Dubai and the Emirates. When Dubai sneezes Kerala catches cold and this is likely to be proved truer than ever as experts feel Dubai will face severe downturn in real estate and financial sectors, which are likely to affect remittances and jobs.

Bank of Baroda, ICICI Bank and State Bank of India — said their exposure to real estate firms in the Gulf region was either nil or insignificant. “We have only 7-8 per cent of our total loan-book in the entire Gulf region, which amounts to Rs 10,000 crore. These accounts are well maintained and is unlikely to cause any kind of impact on the balance sheet,” Bank of Baroda’s Chairman and Managing Director M D Mallya said.

Out of the total Gulf loan exposure, Dubai constitutes nearly half to the loan book, which comes to less than Rs 5,000 crore, Mallya said, adding that the industry needs to wait a few more days to get a clearer picture of the crisis. State Bank of India, said it did not see any concerns emerging on account of the Dubai crisis as the bank has only minimal exposure in the UAE, bulk of which are short-term loans. “Bulk of our loans in the UAE are short-term and the rest medium-term.

Jewellery exporters says that its total revenue may did by seven to eight% in the current fiscal if the on-goining financial crisis in Dubai converts into a full-grown one. However if the crisis continues over to the next year, private players in Dubai barring those dealing in real estate would be highly affected.

Even U.S. felt the tremors as stocks slumped in the U.S and investors reacted to the global selloff triggered by a debt crisis in Dubai. Crude oil neared a six-week low, gold tumbled and the dollar soared as worried investors fled riskier assets and moved into safer havens. The stock market’s slide began in Europe on Thursday and continued in Asia on Friday after Dubai said it would delay debt repayments from its investment company, Dubai World. The decision raised broader questions about the safety of emerging-market debt and the strength of the global recovery.

The Dow Jones Industrial Average was recently down 131 points, or 1.3%, to 10333.58 and had fallen as low as 10231. All 30 of the Dow components were in the red, led by Microsoft, off 2%, Caterpillar, off 1.9%, and Exxon Mobil, off 1.8%. In Asia, Japan’s Nikkei stock average slid 3.2%. Hong Kong’s Hang Seng index tumbled 4.8%. South Korea’s benchmark dropped 4.7%. The MSCI index, a key measure of emerging-market shares, fell 1.3% to a 2-1/2 week low.

The dollar was higher, with the U.S. Dollar Index, which measures the greenback against a basket of six other currencies, up 0.3%. The euro fell to $1.4967, down from $1.5017 late Wednesday. Treasurys also gained. The two-year note was recently off 3/32 to yield 0.695%, while the 10-year note slid 12/16 to yield 3.223%.

Friday’s moves in the financial markets reverse a recent trend in which investors have generally favored riskier investments, reflecting optimism that the world was coming out of recession. Now all attention is on Dubai and Greece, which is scrambling to refinance its own mounting public debt. Dubai developments could set off a shake-out in stocks, crude, gold and other assets that will last at least a few days longer. According to data from the federal Energy Information Administration, the United Arab Emirates was the world’s eighth-largest oil producer in 2008. It is also believed to hold a sizable official reserve of gold. The S&P 500’s basic-materials and energy sectors were its weakest categories on Friday, off about 2%. All the index’s other sectors traded lower as well, pushing it to a 1.4% decline overall.

The sell-off may be a much-needed correction after asset prices rallied substantially this year as central banks and governments opened the money supply tap to pull the world out of the worst recession since the 1930s.

“We’re bound to see a rise in risk aversion,” said Arnab Das of Roubini Global Economics, whose founder Nouriel Roubini predicts a double-dip recession where the economy, after recovering from the depths, contracts again as economic stimulus effects fade away.

Mark Mobius, executive chairman of Templeton Asset Management, told Bloomberg News that the Dubai crisis may be the trigger to allow for the market to take a rest and pull back. “If Dubai has to default, that could start a wave of defaults in other areas,” he added.

British banks have the most loans outstanding to the United Arab Emirates in Europe, constituting $49.5 billion of a total of $87.3 billion extended by the continent’s lenders to the Gulf country as of June 2009, Royal Bank of Scotland Group said in a research report on Friday, citing Bank for International Settlements.

But policymakers and Indian companies, which have operations in the Emirate, believe the impact may not be much even as British football stars David Beckham, Michael Owen and Hollywood couple Brad Pitt-Angelina Jolie stare at losses from investing in Dubai’s Palm Jumeirah, the best-marketed property in the world in recent years.



No comments yet — be the first.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: