Dubai debt crisis

A ASSIGNMENT On

Dubai Debt Crisis

Submitted in Partial Fulfillment of the Requirements for the Award of the Master Degree of Business Administration

By

AR.Vignesh (09bs0002676)

Submitted to

Prof. Rajasree Nandi Nath MBA, MS(Finance)(Icfai), CFA(Icfai)

IBS Kochi

INDEX

Sno

Topic

Page no.

1

Introduction

1

2

Overview of Dubai financial position

2

3

Reason for Dubai debt crisis

5

4

Impact of Dubai debt crisis

7

5

Impact on World and Indian economy

10

6

Beneficiaries of Dubai debt crisis

12

7

Conclusion

13

Appendix

a. Tables and graphs

 b. Sources and references

1. Introduction Dubai is one of the seven emirates of the United Arab Emirates (UAE). It is loca locate ted d sout south h of the the Pers Persia ian n Gulf Gulf on the the Arab Arabia ian n Peni Penins nsul ula. a. Th Thee Duba Dubaii Municipal Municipality ity is sometimes sometimes called Dubai state to distingui distinguish sh it from the emirate. Written accounts document the existence of the city for at least 150 years prior to the formation formation of the UAE. Legal, political political,, military military and economic economic functions functions with the the othe otherr emir emirat ates es with within in a fede federa rall fram framew ewor ork, k, alth althou ough gh each each emir emirat atee has has  jurisdiction over some functions such as civic law enforcement and provision and upkeep of local facilities. Dubai has been ruled by the Al Maktoum dynasty since 1833. Dubai's current ruler, Mohammed bin Rashid Al Maktoum, is also the Prime Minister and Vice President of the UAE. The emirat emirate's e's main main revenu revenues es are from from touris tourism, m, proper property ty and financ financial ial servic services. es. Althou Although gh Dubai' Dubai'ss econom economy y was origin originall ally y bu built ilt on the oil indust industry, ry, revenues from petroleum and natural gas currently contribute less than 6% (2006) of the the emir emirat ate' e'ss US$ US$ 80 bill billio ion n econ econom omy y (200 (2009) 9).. Prop Proper erty ty and and cons constr truc ucti tion on cont contri ribu bute ted d 22 22.6 .6% % to the the econ econom omy y in 20 2005 05,, befo before re the the curr curren entt larg largee-sc scal alee construction boom. Dubai Dubai has attrac attracted ted attent attention ion throug through h its real real estate estate proje projects cts and sports sports events. This increased attention, coinciding with its emergence as a Global City and business hub, has highlighted labour and human rights issues concerning its largel largely y South South Asian Asian workfo workforce rce.. Establ Establish ished ed in 200 2004, 4, the Dubai Dubai Intern Internati ationa onall Finance Centre was intended as a landmark project to turn Dubai into a major  international hub for banks and finance to rivals New York, London and Hong Kong. Dubai's gross domestic product as of 2005 was US$37 billion. Although Dubai's Dubai's economy was built on the back of the oil industry, industry, revenues revenues from oil and natural gas currently account for less than 6% of the emirate's revenues. It is esti estima mate ted d that that Duba Dubaii prod produc uces es 24 240, 0,00 000 0 barr barrel elss of oil oil a day day and and subs substa tant ntia iall quantities of gas from offshore fields. The emirate's share in UAE's gas revenues is about 2%. Dubai's oil reserves have diminished significantly and are expected to be exhausted in 20 years. Property and construction (22.6%), trade (16%), entrepôt  (15% (15%)) and and fina financ ncia iall serv servic ices es (11% (11%)) are are the the larg larges estt cont contri ribu buto tors rs to Duba Dubai' i'ss economy.

2. Overview of Dubai’s financial position

The Dubai Financial Market (DFM) was established in March 2000 as a secondary market for trading securities and bonds, both local and foreign. As of  fourth quarter 2006, its trading volume stood at about 400 billion shares, worth US$ 95 billion in total. The DFM had a market capitalization of about US$ 87  billion. The government's decision to diversify from a trade-based, but oil-reliant, economy to one that is service and tourism-oriented has made property more valuable, resulting in the property appreciation from 2004–2006. A longer-term assess assessmen mentt of Dubai' Dubai'ss proper property ty market market,, howeve however, r, showed showed deprec depreciat iation ion;; some some  properties lost as much as 64% of their value from 2001 to November 2008. The large scale real estate development projects have led to the construction of some of  the tallest skyscrapers and largest projects in the world such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world's second tallest, and most expensive hotel, the Burj Al Arab. Dubai's top re-exporting destinations include Iran (US$ 790 million), India (US$ 204 million) and Saudi Arabia (US$ 194 million). The emirate's top import sources are Japan (US$ 1.5 billion), China (US$ 1.4 billion) and the United States (US$ 1.4 billion). Dubai's property market has experienced a major downturn in 2008/2009, as a result of the slowing economic climate. Mohammed al-Abbar council of the sheik told the international press in December 2008 that Emaar had credits of US$ 70 billio billions ns and the state state of Dubai Dubai additi additiona onall USD 10 billio billions ns while while holdin holding g estimated USD 350 billion in real estate assets. By early 2009, the situation had worsened with the global economic crisis taking a heavy toll on property values, construction and employment. As of February 2009 Dubai's foreign debt was estimated at apprx. USD 100 billion, leaving each of the emirate's 250,000 UAE nationals responsible for 400,000 USD in foreign debt. However, it should be noted that little of this is sovereign debt.

Some weeks ago, Dubai had issued to international investors, bonds worth $1.9trillion, which sent the message that its economic position is unshakable! But now that foundation has shaken!

Inability to pay debt:

Dubai government has announced just recently, for the time being , not in a  position to repay its outstanding debt of $7,40,000.At the same time, Government owned mega finance institution-Dubai World also declared that it may not be able to repay any loan for 6months.This 'Dubai World' is engaged in different business enterprises like-transport, ship building, township building, etc. A sister-concern of  Dubai world a building construction company, named NAKHEEL is also telling that it requires some more time to repay its debt installments. Speculation has mounted that Dubai was struggling under a mountain of  debt and would have to start selling assets or get bailed out by Abu Dhabi. Property prices in Dubai have plummeted by as much as 40pc in two months. Officially Dubai continued to insist everything was fine while refusing to reveal any figures. Meanwhile Dubai’s stock market is down 60pc this year, hitting many of the listed companies. Assets and liabilities of Dubai: (as of 05.12.2009) Sno.

1 2

Particulars Liabilities: Sovereign debt State-affiliated debt

Amount

$10 billion $70 billion

1 2

Asset: Sovereign assets State-affiliated companies assets

$90 billion $260 billion

So, total debt: $80bn against total assets of $1.3trillion • •

•

Dubai GDP Dh198bn (35.6bn pounds) Ratio of debt: GDP is 148% compared with 57% in USA, 40% in Britain, 99% Japan Debt per capita: $40,000 per head if split between Dubai’s population of two million.

Ray of hope:

In spite of all these, experts hope that it is possible to recover. It comes out of past past expe experi rien ence ce.. Duba Dubaii had had face faced d simi simila larr econ econom omic ic cris crisis is in 19 1999 99.T .The hen n Abudhabhi, another emirate in UAE, had helped Dubai by lending a loan of  $1,00,000. Abudhabhi is a financially stable country..It can help. But the quantum of need this time is much more than it was in 1999.Just on 29 November, Abudhabhi has announced that it would consider the financing aspect, item wise, taking each main transaction on merits. It has also clarified, it is not going to take full responsibility of all loans. th

All these indicate that Dubai's financial foundation is ...... SHAKING..!

3. Reason for Dubai Debt Crisis

Dubai, unlike other six emirates of UAE is not a country rich with oil resources. This city state is purely a business city which wholly depending upon tour touris ism m and and othe otherr busin usines essses. es. Dub ubai ai Worl orld, in a hast hastee to att attract act world rld entrepreneurs started spending more and more on building fine roads, star hotels etc. Foreign institutional investors also invested much here, especially during the last four years. What happened was that the Dubai government requested the creditors of  Dubai World (one of three conglomerates that are backed by the emirate), to agree to a 'standstill' on repayments until May 30 2010. The standstill also applies to the $4.05 billion sukuk, or Islamic bond, issued   by Nakheel, the state-owned builder famous for the spectacular Palm Jumeirah scheme scheme and other other such such mind mind bog boggli gling ng projec projects ts that that involv involvee largelarge-sca scale le land land reclamation. Nakheel's parent company is Dubai World. The truth is that Dubai is being crushed under a mountain of debt. The emirate has chalked up debt in excess of $80 billion by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a sixmonth standstill on its debt repayment to all its lenders. The emirate borrowed $80 billion in a four-year construction boom that transformed Dubai into a glittering jewel in the middle of the Gulf region and also into a tourism and financial hotspot. Dubai's sovereign credit default swap has surged 1.11 per cent to 4.29 per  cent, leading to global rating agency Standard & Poor's placing the ratings of four  Dubai-based banks on negative outlook due to their exposure to Dubai World. The debt itself might not seem too high, but the uncertainty surrounding the entire issue has spooked financier. Investor confidence the world over has been shaken up badly, as many wonder if the world would slip into another recessionary

 phase, given that there are some other nations in a similar situation as Dubai: Greece, Iceland, Hungary being just a few of them.

Many nations that are following Dubai's development pattern are inviting trouble, said analysts. Economists fear that they might have been too hasty in  predicting that the global financial crisis had ended. The Dubai shock was as severe as it was sudden. Just a few weeks ago (November first week), Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum, had assured all that the emirate's financial condition was all right, saying that it would raise more funds to meet its financial commitments and would be more cautious. As is normally the case in autocratic regimes like Dubai, no one knew what the real situation was till it was too late. Analysts feel that either the ruler was unaware of the magnitude of the problem or his advisors asked him to keep it under the wraps.

4. Impact of Dubai Debt Crisis

A storm broke out in last November, emanating from the part of the world that is widely seen as a major beneficiary of the rise in oil prices. Yet Dubai’s story is not about oil. Indeed it is precisely the absence of oil and natural gas (less than 6% of GDP) that prompted this emirate go down the path of tourism, hospitality, and commercial real estate development, that lies at the heart of the matter now. The financial crisis in Dubai continues the Tower of Babel curse. Attempts to build the tallest building in the world require such investor euphoria and access to capital that they frequently mark a top of the cycle. Burj Dubai, which was topped earlier this year did not just edge out the former giant Taipei 101, but leapt above it (at 818 meters vs. 509 and 162 floors vs. 101). Twice Told Tale

It has been clear for some time that Dubai’s opulent construction of an adult  play ground in the Middle East was a bit over the top and that its projects were designed for radically different economic conditions. There have been reports of  largely empty luxury hotels, unfinished projects, partially built buildings and more difficult credit conditions. Construction companies, suppliers and foreign workers have reported that the commercial real estate bubble has popped. Earlier this year, Nakheel, the  property company owned by Dubai World, which is the chief protagonist, received financial support. Like Like the the simi simila larr reas reason onin ing g that that the the US Fede Federa rall Depo Deposi sitt Insu Insura ranc ncee Corporation (FDIC) often uses in announcing bank closures after the markets have

closed on a Friday(in november), Dubai World’s request for a six month standstill on the servicing of its $59 billion of debt, including a $3.5 billion sukuk (Sharia compliant bond-like instrument) instrument) that was to mature in December. The usual lack of  transparency, coupled with the region religious holiday and the Thanksgiving Day holida holiday y in the United United States States,, made made for extrem extremely ely thin thin market market condit condition ionss and encouraged risk-minimization and defensive actions. Matters were further complicated by the postponement of a Dubai World   press conference and a computer glitch at the UK’s London Stock Exchange, which incidentally but unrelated is reportedly a fifth owned by the Dubai. Many believe that as goes Dubai World so goes Dubai, and expect its larger  and richer neighbor, Abu Dhabi to exact political concessions in exchange for   providing support. Dubai World accounts for roughly three quarters of Dubai’s debt and about half of Dubai’s $25 billion remittances. There are seven emirates in all that make up the United Arab Emirates (UAE (UAE). ). Duba Dubai’ i’ss GDP GDP of roug roughl hly y $4 $40 0 bill billio ion n acco accoun unts ts for for some someth thin ing g on the the magnitude of 2% of UAE’s GDP. Yet what ails Dubai appears to be affecting the UAE UAE as whol whole. e. Some Some repo report rtss indi indica cate te that that near nearly ly half half of the the $5 $582 82 bill billio ion n construction projects are on hold or simply cancelled. Implications

There are a number of channels by which the events in Dubai can have a material impact on the global capital markets even for those who are not directly exposed. However, we judge the immediate reaction excessive, while at the same time recognizing that the panicked reaction reaction confirms our suspicion that despite the rally in risk assets since late March, market sentiment remains fragile and jittery.

First, a review of data from the Bank for International Settlements suggests that that ou outs tsid idee of the the UK, UK, fore foreig ign n bank bank expo exposu sure re to the the UAE UAE itse itself lf is rath rather  er  diversified, though as one might have suspected, they are concentrated in Europe. Of the roughly $123 billion UAE foreign obligations, UK banks are responsible for  about $50 billion and Europe as a whole almost $90 billion. US banks account for  about $10.6 billion, while Japanese banks have just shy of $9 billion exposure. Trying to drill down to the emirate level and company level are a bit more difficult as the data is hard to find and what is available appears few years old at  best. Nevertheless, while a default by Dubai, should it come to that, would be the largest sovereign default since Argentina in 2001, would do the beleaguered banks no favors, it probably will not undermine capital ratios in any material sense.

A second potential impact is on the monetary policy of the major central  banks. Central banks in the developed countries for the most part, with the UK a notable exception, are unwinding some of the extraordinary measures associated with the crisis, though for the most part (Australia and Norway are the exceptions) stopping shy of actually raising interest rates. The new albeit mild shock for their  troubled banks and, should the heightened volatility in the global capital markets  be sustained, would seem to encourage policy makers, in anything, to move slower  and more cautiously perhaps than before. We think this is of marginal significance at the moment. A third potential impact is on the UAE’s peg to the dollar. While the Saudi’s stance toward the dollar peg has been unwavering, the UAE’s central banker has  been all over the board. In mid-November, Kuwait’s basket approach was seen favorably as an alternative to the dollar-peg, but late in the month, desire to drop the dollar appeared to have cooled off significantly. The dollar’s peg among the Gulf Cooperation Council, except for Kuwait, is an element of stability and may be marginally less likely to be jettisoned now than before.

5. Impact on World and Indian Economy

Anxiet Anxiety y over over Dubai’ Dubai’ss econom economic ic health health has shaken shaken world world market marketss after  after  Dubai World, the fulcrum of the emirate’s economy, announced that it would delay repayment of some of its debt. The lack of information about Dubai’s flagship holding company, which is owned by the government, triggered indiscriminate selling of stocks linked to the region. Dubai, which borrowed $80 billion to fuel a four-year construction boom, was badly hit by the global recession, with home prices halving since the 2008  peak. The Dubai World conglomerate is the emirate’s largest corporate entity, with its businesses covering real estate, port and leisure sectors. The company has asked for a “standstill” agreement to delay repayment by six months on most of its $59  billion of debt. Markets in Asia fell sharply in the backdrop of the disclosure. In Japan, the  Nikkei 225 had lost 3.2 per cent, its biggest one day fall in nearly eight months. In Seoul, the Kospi dropped by 4.7 per cent, marking a four-month decline. Hong Kong’s Hang Seng fell by 4.8 per cent. The cascading effect of Dubai’s debt problems were felt worldwide, because the emirate is the region’s key financial centre, and is well integrated with global markets. Analysts say that any default in debt repayment by Dubai can set a danger dangerous ous preced precedent ent,, and the contag contagion ion could could spread spread,, threat threateni ening ng the fragi fragile le recovery of the global economy from recession. Oil Oil pric prices es have have drop droppe ped d shar sharpl ply, y, rais raisin ing g conc concer erns ns abou aboutt econ econom omic ic confidence in the world economy. In the United States, crude oil fell by 5% to $74.23 a barrel and London L ondon Brent Crude oil dropped $1.47 to $75.42. However, some analysts are of the view that the emirate of Abu Dhabi, which is rich in oil, and continues to remain financially strong, is expected to bail out Dubai out of its current financial difficulties. Fuelled by its oil revenues, Abu Dhabi, unlike Dubai continues to witness as real real esta estate te bo boom om,, abso absorb rbin ing g Sout South h Asia Asian, n, and and espe especi cial ally ly Indi Indian an labo labour ur in significant numbers.

About 4.5 million Indians live and work in the Gulf region and remit more than than $10 billio billion n annual annually. ly. Repres Represent entati atives ves of major major Indian Indian constr construct uction ion and engineering companies have maintained that Dubai’s financial woes are unlikely to affect them much as their exposure to the emirate’s real estate sector has been limited. India’s only full-service back in the United Arab Emirates (UAE), Bank of  Baroda has exposure of 7-8 percent of its loan book in the country. The lender’s chairman, M.D. Mallya, told Reuters on Friday(27.11.2009) that the bank’s total exposure in the UAE stood at around Rs. 100 billion out of a total loan book size of Rs. 1.5 trillion. “Our exposure includes both corporate and retail accounts and not only the real estate portfolio,” Mr. Mallya was quoted as saying.

6. Beneficiaries of Dubai Debt Crisis

As invest investors ors flee flee debt debt in Dubai, Dubai, neighb neighbori oring ng Bahrai Bahrain, n, Qatar Qatar and Saudi Saudi Arabia are likely to pick up much of its Islamic banking business, though the financial hub is expected to bounce back eventually. While banks and builders from London to Singapore count their losses from Dubai's troubles, there are also worries the crisis will hurt its status as a regional centre for sharia finance, which itself had a hand in the emirate's meteoric rise. Dubai got down investments as Islamic banking boomed on the back of  record oil prices, drawing throngs of specialist lawyers and bankers attracted by its ease of doing business and more cosmopolitan lifestyle than its conservative rivals. The emirate positioned itself as a Islamic finance centre with top lenders like HSBC, Deutsche, Standard Chartered using it as a base, as it sought to become a financial hub between Asia and Europe. Much of that money and talent could now to flow to its immediate neighbors as Dubai slowly works through its mountain of  debt and its shaken financial community exhibits a newfound aversion to risk. Up for grabs is a bigger share of an estimated $1 trillion Islamic financing industry, which like conventional banking is back on a growth trajectory as the global credit crisis ebbs. Saudi Arabia, Bahrain and Qatar, which also have ambitions of becoming region regional al financ financial ial centers, centers, will will catch catch up as they they are well well regula regulated ted and have have developed at a more measured pace, bankers told Reuters. Countr Countries ies outsid outsidee the Middle Middle East East are less less likely likely benefi beneficia ciarie ries, s, market market watchers say. Malaysia, for example, has the world's largest Islamic bond market and is known for more business-friendly interpretations of what is allowed under sharia law than many Gulf countries, opening the door for a far greater range of financial  products. Its ringgit currency, however, is tightly managed, restricting the ease of  invest investmen mentt flows flows.. Many Many Gulf Gulf curren currencie cies, s, meanwh meanwhile ile,, are change changed d to the U.S. U.S. dollar.

7. Conclusion

In spite of all criticism from around the world Dubai still has an hope to  bounce back from this issue. This kind situation is not a new one to Dubai. Earlier  during 1991, Dubai faces same kind of problem . but it came out that issue tragically. At that time its sister emirate abu dabhi financed to recover from it. Of course now the amount require to recover from this issue is huge when compare to earlier. But there is being supported by abu dabhi with some limitation. As of now Dubai may or may not survive in the future. Because day by day its stock market value coming down due to this issue. If Dubai is not able to repay its debt, it will cause big set back to all over the world. It will create more unemployment problem to India(42.5% population in Dubai are Indians).

a. Tables

1. Comparison of current price with past prices:

Banks Closing Price of  2006 Closing Price of  2008

2,406.98

Closing Price of 2007

3,414.53

1,096.75

Closing Price of 2009

973.49

4,603.94

Closing Price of 2007

8,061.88

2,430.34

Closing Price of 2009

2,109.97

4,785.43

Closing Price of 2007

4,629.69

3,336.06

Closing Price of 2009

3,402.42

9,929.65

Closing Price of 2007

13,681.10

Fin/Invest. Closing Price of  2006 Closing Price of  2008

Insurance Closing Price of  2006 Closing Price of  2008

Realestate Closing Price of  2006

Closing Price of  2008

2,375.93

Closing Price of 2009

2,819.36

-

Closing Price of 2007

935.40

378.68

Closing Price of 2009

459.96

Transport. Closing Price of  2006 Closing Price of  2008

Materials Closing Price of  2006 Closing Price of  2008

309.47

Closing Price of 2007

348.39

247.45

Closing Price of 2009

139.58

664.00

Closing Price of 2007

664.00

396.00

Closing Price of 2009

501.00

1,058.25

Closing Price of 2007

1,199.03

351.13

Closing Price of 2009

454.69

C.Staples Closing Price of  2006 Closing Price of  2008

Telecomm. Closing Price of  2006 Closing Price of  2008

b. Graphs

1. Dubai UAE index (from 01.11.2009 to 11.12.2009):

c. Sources and References Sno 1 2

3

4

5

Website http://en.wikipedia.org/wiki/Dubai http://hubpages.com/hub/FINANC http://hubpages.com/hub/FINANCIAL-CRISIS-IN IAL-CRISIS-IN-DUBAI-REASIN -DUBAI-REASINS-ANDS-ANDEFFECTS http://blogs.telegraph.co.uk/finance/ http://blogs.telegraph.co.uk/finance/louisearmitstead/58 louisearmitstead/5829577/Dubai_final 29577/Dubai_finally_r  ly_r  eveals_its_financial_position/ http://business.rediff.com/slide-show/2 http://business.rediff.com/slide-show/2009/nov/27/slide-sh 009/nov/27/slide-show-1-dubai-shock ow-1-dubai-shock-why-it-happened-how-it-hits-ind why-it-happened-how-it-hits-india.htm#contentTop ia.htm#contentTop http://seekingalpha.com/article/1757 http://seekingalpha.com/article/175772-the-potential-im 72-the-potential-impacts-of-dubaipacts-of-dubai-ssfinancial-crisis

6

http://beta.thehindu.com/business/article55995.ece

7

http://www.dfm.co.ae/pages/default.aspx?c=1053

8

http://www.nasdaqdubai.com/products/ftse.html