Dubai Crisis:
As Dubai World - the main investment arm of the city of Dubai, made the announcement of its ongoing talks with its creditors to delay the $60 billion debt payment by around six months, the credit rating agencies slashed debt ratings for many of Dubai's state companies. What followed after became the headlines of every news channel around the world. The world financial markets, from Japan to US, were highlighted in red as the stocks listed went down in terms of their value.
Dubai World is Dubai's main holding and investment enterprise. While it is well known for its ultra-lavish tourist resorts in countries such as Canada, US, UK etc., it is also involved in residential developments- such as Palm Islands in Dubai. The Palm Islands are artificial islands in Dubai, United Arab Emirates on which major commercial and residential infrastructure will be constructed. They are being constructed by Nakheel Properties - the real estate division of Dubai World, who hired Belgian and Dutch dredging and marine contractor Jan De Nul and Van Oord, some of the world's specialists in land reclamation. The islands are the Palm Jumeirah, the Palm Jebel Ali and the Palm Deira.
The reason why the world financial market responded negatively to the Dubai debt news is because the investors around the world perceived that owing to the Dubai debt crisis, the banks- that had only recently resumed lending, would again put a hold on it and would restructure their lending policies that in turn would adversely impact the global recovery process. What added oil to the already buring fire was the news that Dubai World was not guaranteed by the government.
The Banks that are likely to be impacted most in case Dubai World defaults on its debt, are those that have substantial financial investments in Dubai: HSBC ($611M) and Standard Chartered ($177 M).
Although the stock markets around the world tumbled sharply, markets such as those in the US and India recovered slightly after the investors learnt about the minimal investment exposure of the bank's in these countries to Dubai.
The sky scrapers standing tall on the coastal lines of Dubai are standing vacant with demand for the real estate falling - be it buying a new flat or even renting one. The global financial crisis has hit Dubai in the area of real estate. Many constructions projects are either on hold or are completely shut down. The global financial has caused the real estate sector to suffer losses worth Euro 50 billion. The sale price of villas being built on the artificial Palm Island has fallen dramatically. Analysts at investment bank UBS predict around 30% fall in the property market in Dubai. The building boom in Dubai - too many buildings being built causing supply to surpass demand by a significant amount, also added to its current debt crisis. It is expected that there will be an oversupply of property in Dubai by 25% in the year 2010.
How Dubai ended up in the current debt situation is as follows- for many years the construction companies in Dubai kept on constructing more and more buildings on the basis of the strategy-"If you build it, they will come and the borrowing will pay for itself". For most of the decade this economic strategy worked for Dubai helping the real estate sector and the economy grow. Attracted by this growth the foreigners invested their money here with the hope of earning high returns. The construction companies of Dubai kept on borrowing money from their investors and building more and more real estate projects even as the real estate sector around the world suffered from a deflating real estate bubble. As the 2008 global financial crisis happened and the foreign investors extracted their money out of the system to make up for their portfolio losses elsewhere, lots of already finished construction projects were left with their buildings empty and unsold.
A lot now depends on how Dubai world handles its debt and the kind of financial support that Abu Dabhi would offer to it.