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Dubai debt

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by Peter Switzer

It was only a year ago that Dubai was the world champion of the cranes on the skyline test. It has hotels in the middle of the sea and has re-created a micro-Venice in a resort complete with gondolas, but now it wants half a year off from paying its debts.

So, should we be worried? Is this another Lehman Brothers waiting to happen which could throw the world into credit crunch Mk-II?

The simple answer is: “I don’t know!” But I hate answers like that and here’s my best guess.

Manageable problem

I think the issue is manageable and that’s what is likely to happen — it will be managed.

Everyone expects Abu Dhabi to ride to Dubai’s rescue. Reports out today, however, suggest the big kahuna of the seven emirates — Abu Dhabi — might make its little, yet big spending buddy Dubai sort out its own debt problems.

This could rattle world money markets and make banks again scared to lend without safeguards and higher interest rates. That could slow down the global recovery, recreating recession conditions and could trigger the despised double dip into recession the bears have been praying for.

Head of investment strategy at AMP, Dr Shane Oliver, thinks Abu Dhabi won’t allow Dubai to default.

What’s really intriguing is the Gulf states are actually big lenders to the USA and so if this problem hit the flow of funds to the Yanks then it could also push interest rates up. This would be another trigger for KO’ing the recovery.

Global effects

The Sydney Morning Herald quotes David Halliday, a Macquarie Equities director, who thought our market overreacted with its sell off on Friday. He does not see this as a systemic problem for the global financial system.

The Hindu Business Line website explained that the problem debtor is Dubai World, an investment conglomerate run by the Dubai Royal family, which has a debt of $59 billion while Dubai's total debt is $80 billion.

This kind of debt is called sovereign debt and the thought of a sovereign wealth fund not paying up could rock the global financial markets.

C.J. George, CEO of broking firm Geojit BNP Paribas in India, which has a large presence in the United Arab Emirates, thinks the problem will be Dubai-specific.

He was asked if he thought Dubai’s debt problem could lead to a major crisis, or could it escalate to other Emirates.

“Fortunately, the real estate bubble was limited to the Emirate of Dubai only and, hence, I am of the view that this will be the end of the crisis for Dubai,” he said. “The other Emirates are relatively stronger in terms of debt obligations. Dubai will continue to retain the position as a global centre in the region leveraging the proximity of the Indian sub-continent.”

He made another interesting observation.

India will be to Dubai what China is to Singapore, unless 'one day' Mumbai claims that position.

Burst bubble

By the way, part of Dubai World’s problems came from a silly decision to grant foreign buyers of Dubai World real estate, which was bought by Indian, Russian and European investors with six-month visas.

The properties being sold had 99-year leases and it was presumed that a 99-year visa would go with the sales.

Now remember, Dubai runs out of oil in the next decade and that’s why it has been positioning itself as a global centre for finance, trade and tourism.

Cheap money worldwide and Dubai’s push for investors in real estate created a bubble that burst when the credit crunch happened.

“If Dubai announces any investor-friendly revision of the visa period, it can dramatically change the fortunes of domestic real estate market,” said George.

For advice you can trust, contact Switzer Financial Services.

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Published on: Monday, November 30, 2009