Dubai Crisis





The crisis began when investor of Nakheel a real estate developer flagship of Dubai World considering deferring the payment of Islamic bond ‘sukuk’ that is to come up for payment on 14th December. This irritated the investors and they pressed the panic button.  The crisis in Dubai triggered sell off across the world. Equity and commodity market plunged by more than 3% in Asia though European market saw selling pressure in the beginning but later recovered. It seems that the dream run of Dubai has come to an end. Now things happening in Dubai will be more on realistic front. But as long as the Suadi Arabia and Iran having stricter rules and regulation city Dubai will again come out of woods and start its dream run as the people from these region will seek pleasure in Dubai.

Dubai embarked on the growth train after the discovery of oil in 1966. In 1966 the city has the population of only 58000 and it increased over the period of time to 1.5 million. Out of total population 80% are expatriates.
The city’s rapid growth is the vision of ruler Sheikh Mohammad bin Rashid al-Maktoum. He outlined his Vision in the book ‘My Vision’. Dubai model became the envy of the neighbor.
The real estate big boom began in 1999 when property market was opened to investors from outside the Gulf Co-operation Council countries. Properties prices kept on increasing at breath necking pace. Speculative money moved in and drove the price beyond normal people reach. Higher prices ensured more supply of real estate and ‘Oasis’ started to become a mirage for the normal people.
The dream run crashed when the Global Economy went tumbling down due to subprime crisis. The real estate in Dubai crashed most in the world by more than 50%. The servicing of debt became difficult as there was credit freeze across the world and it became difficult to sell the properties.

In a journey to become world flashy city state owned companies accumulated debt of over $80 billion. The debt is 126% of the GDP of Dubai. Of this staggering amount of debt Dubai World the state owned company has $60 billion of debt.
World’s top bank has exposure in the short term paper of the Dubai World. So any sort of default is sure to send tremor to the fragile financial market.
Friday fall was because of the delaying the date of repayment of $3.5 billion sukuk bond that is due on 14th December, 2009.The bond was issued by Nakheel a branch of Dubai World. The announcement irritated the investor and they triggered the panic button.
Dubai Company has $13.1 billion of debt that is due for payment in 2010 and around $47 billion of debt that is due before 2013. The companies should either increase their profitability to pay off or arrange to refinance the debt. Second option is more likely but the question arises who will buy these debts. Anyone who goes for shopping this huge debt will be either selective in picking or will lay very restrictive terms and condition.
Earlier this year UAE central bank has given around $10 billion of credit to Dubai. S&P analyst tracking the region is of the view that only $3-4 billion is left out of $10 billion credit, so the going cannot be easy for the Dubai.
Abu Dhabi which the wealthiest emirates in the UAE is an hour drive from Dubai has around $800 billion of surplus. So if Abu Dhabi comes to the rescue things could be easy for Dubai but Abu Dhabi will prove to be toughest lender.
One option may be Abu Dhabi taking stake in Dubai crown jewel companies like Emirates Airlines, Port operator DP world and Dubai Aluminum.

Other card Dubai leaders have is exploits the family ties they have. Sheikh Mansour bin Zayed Al Nahyan for instance  who recently made $2 billion by selling stake in Barclay bank and is considered the third most influential member in the Abu Dhabi family, is married to the Dubai sheikh`s favorite daughter.

Over 50 lakh people are employed in Middle East out of this 20 lakh are from Kerala. Dubai employs around 10 lakh Indian. In 2008 around 3.4 lakh people went to UAE. The remittance from the Middle East region is in the range of $43.5 billion in 2008. Kerala remittance amounts to around 20% of the state GDP.
Most the worker in Dubai is working for the real estate project in the region. In the past one year the unemployment rate in the region has increased to 30%. Nakheel the real estate developer has sacked over 80% of the employs in the past one year.
Any crisis in the region will have direct fallout on the Indian especially southern Indian economy. For the southern state the problem is grave.


NAGARJUNA CONSTRUCTION: The Company is doing around Rs 1400 crore apartment project in Dubai. Along with this company is also doing 100 crore water pipeline project at Dewa Dubai.

LARSEN & TOUBRO: The Company has exposure in the hydro-power segment. The exposure in the region is to the tune of $200 million.

Voltas: The company is doing Rs 900 crore project in Dubai as part of the joint venture where Voltas is having 37% stake.

BANK OF BARODA: The bank has exposure in Dubai real estate which is to the tune of 5-6% of the total loan book. Bank of Baroda has 10 branches in the region.

OMAXE: The real estate developer is planning to exit two real estate projects in Dubai. Company has planned an investment of Rs 2850 crore.

SPICE JET: Dubai World investment arm Istithmar holds 13% stake in the Spice Jet.

ABAN OFFSHORE: The Company has deployed 6 rigs in the West Asia.

GEOJIT FINANCE: Kerala based brokerage firm has major client base in the Middle East region. Any crisis in the region will affect its top line.

FEDERAL BANK: South Indian bank does major business from the Middle East region. It provide for the remittance and other service. Any problem will directly or indirectly hit the bank.

The real picture of the crisis will only emerge when Dubai resumes business after the long holiday on occasion of Eid-ul-Azha. The situation is very fluid and time is difficult for Dubai. On one side sovereignty of Dubai is at stake and other there are chances of severe default in payment. What route the existing ruler choose, time will tell.
In any of the scenario the Dubai dream run if not over is facing the glitches.


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