Dubai cries but state gets a reason to smile

On Wednesday, when Dubai announced that it was asking banks to allow state-owned Dubai World to suspend loan repayments on much of its $59 billion of debt for six months, it sent shivers down the world’s spine. Markets crashed everywhere, including in India, on fears that there may be worse to come.

The roll-on effects of that crash were visible on Friday, when the Bombay stock exchange Sensex sank as much as 634.16 points, or 3.76%, midway into the trading session. It later recovered and closed with a loss of some 220 points, or 1.3% over the previous close.

The Dubai World conglomerate, which has a host of companies under its fold, has interests in a wide range of businesses such as realty, infrastructure, logistics and economic zones, not just in the region but across a clutch of countries, including India.

The markets are not sure if Dubai is going to allow its former crown jewel to go bankrupt. Worse, does this tell us something about the Dubai government’s own financial state?

The short answer: Dubai is not going bankrupt anytime soon. In fact, the reverse may well be true because it has just begun the process of cleaning up its debt-heavy financial system, say analysts. It is unlikely to go under because its deep-pocketed brother emirate Abu Dhabi, which has a sovereign wealth fund alone of $800 billion, has already bailed it out last week.

But India will feel some of the tremors. Indians make up 40% of the UAE’s population, and Indians in Dubai account for 10-12% of the annual remittances to India.

There are also many alliances between Dubai firms, especially in real estate, and Indian ones. Among them: Emaar Properties has a joint venture with MGF which is planning to invest Rs 50,000 crore over the next five years. Limitless UAE and DLF plan to invest Rs 100,000 crore outside Mumbai and Gurgaon, including a township in Bidadi in Karnataka. Engineering firm Larsen & Toubro has a small exposure to Dubai, while rival Punj Lloyd has contracts in Abu Dhabi.

The Kerala government is, however, concerned. About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to government data.

The turmoil may affect remittances, said Thomas Issac, finance minister of Kerala, which accounted for about a quarter of India’s migrant labour in 2005. “It’s quite likely that Dubai will face a severe downturn in the real estate and financial sectors and that will affect remittances and jobs,” Issac said. Remittances from the Middle East account for about 25% of Kerala’s economy, Issac said.

India received $52 billion of remittances last year, according to the World Bank, making it the world’s largest recipient of money from migrant workers. China got $49 billion.

What caused the Dubai crisis? Dubai is the most prominent emirate in UAE but it has the lowest oil reserves in the Gulf, which will exhaust by 2029. To offset this, the government there has, over the last decade, gone into overdrive, especially on real estate development. The mad frenzy was unlike anything ever seen in this world. The idea was also to create in Dubai a financial centre rivalling London, New York and Hong Kong.

But the global crisis of the past 18 months ended this dream with property valuations getting halved. This caused a crisis for the government-owned realty companies such as Nakheel PSC, which is creating the famous palm-shaped, artificially created islands off Dubai.

Dubai World, the state-owned holding company which, in turn, owns Nakheel, has liabilities of $59 billion, or Rs 275,000 crore, or 74% of the total debt of $80 billion of the emirate. Nakheel has to pay $3.5 billion on December 14 for maturing Islamic bonds and another $15 billion next year.

Pascal Devaux, Middle East risk assessment economist at BNP Paribas, told AFP: "Dubai as a state... is not on the verge of bankruptcy, thanks to the support of Abu Dhabi."

Abu Dhabi will help Dubai out of the mess, but the flashier emirate will be asked to tone down its exuberance, said analysts. It may also seek its pound of flesh by asking Dubai’s pride, the Emirates airline, to merge with Abu Dhabi-based Etihad, apart from taking over the Dubai Ports Authority, said Societe General Cross Asset Research in a note on Friday.

If the markets are still skittish, it’s because Dubai was closed for Bakr-Id holidays beginning Thursday through Sunday, which is another reason the global markets heave-hoed. Information was hard to come by on the crisis early on Thursday. Things should get clearer on Monday.