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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
located south of the Persian Gulf on the Arabian Peninsula. The Dubai
Municipality is sometimes called Dubai state to distinguish it from the emirate.
Written accounts document the existence of the city for at least 150 years prior to
the formation of the UAE. Legal, political, military and economic functions with
the other emirates within a federal framework, although each emirate 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 emirate's main revenues are from tourism, property and financial
services. Although Dubai's economy was originally built on the oil industry,
revenues from petroleum and natural gas currently contribute less than 6% (2006)
of the emirate's US$ 80 billion economy (2009). Property and construction
contributed 22.6% to the economy in 2005, before the current large-scale
construction boom.

Dubai has attracted attention through its real estate projects and 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
largely South Asian workforce. Established in 2004, the Dubai International
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 economy was built on the back of the oil industry, revenues from oil and
natural gas currently account for less than 6% of the emirate's revenues. It is
estimated that Dubai produces 240,000 barrels of oil a day and substantial
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%) and financial services (11%) are the largest contributors to Dubai's
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
assessment of Dubai's property market, however, showed depreciation; 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 billions and the state of Dubai additional USD 10 billions while holding
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. Particulars Amount


Liabilities:
1 Sovereign debt $10 billion
2 State-affiliated debt $70 billion

Asset:
1 Sovereign assets $90 billion
2 State-affiliated companies assets $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 experience. Dubai had faced similar economic crisis in 1999.Then
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
th
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.

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
tourism and other businesses. Dubai World, in a haste to attract world
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 and other such mind boggling projects that involve large-scale 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 six-
month 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 the similar reasoning that the US Federal Deposit Insurance


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) that was to mature in December. The usual lack of
transparency, coupled with the region religious holiday and the Thanksgiving Day
holiday in the United States, made for extremely thin market conditions 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). Dubai’s GDP of roughly $40 billion accounts for something on the
magnitude of 2% of UAE’s GDP. Yet what ails Dubai appears to be affecting the
UAE as whole. Some reports indicate that nearly half of the $582 billion
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 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 outside of the UK, foreign bank exposure to the UAE itself is rather
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

Anxiety over Dubai’s economic health has shaken world markets 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
dangerous precedent, and the contagion could spread, threatening the fragile
recovery of the global economy from recession.

Oil prices have dropped sharply, raising concerns about economic


confidence in the world economy. In the United States, crude oil fell by 5% to
$74.23 a barrel and London 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 estate boom, absorbing South Asian, and especially Indian labour in
significant numbers.
About 4.5 million Indians live and work in the Gulf region and remit more
than $10 billion annually. Representatives of major Indian construction 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 investors flee debt in Dubai, neighboring Bahrain, Qatar and 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
regional financial centers, will catch up as they are well regulated and have
developed at a more measured pace, bankers told Reuters.

Countries outside the Middle East are less likely beneficiaries, 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


investment flows. Many Gulf currencies, meanwhile, are changed to the 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
2,406.98 Closing Price of 2007 3,414.53
2006

Closing Price of
1,096.75 Closing Price of 2009 973.49
2008

Fin/Invest.

Closing Price of
4,603.94 Closing Price of 2007 8,061.88
2006

Closing Price of
2,430.34 Closing Price of 2009 2,109.97
2008

Insurance

Closing Price of
4,785.43 Closing Price of 2007 4,629.69
2006

Closing Price of
3,336.06 Closing Price of 2009 3,402.42
2008

Realestate

Closing Price of
9,929.65 Closing Price of 2007 13,681.10
2006
Closing Price of
2,375.93 Closing Price of 2009 2,819.36
2008

Transport.

Closing Price of
- Closing Price of 2007 935.40
2006

Closing Price of
378.68 Closing Price of 2009 459.96
2008
Materials

Closing Price of
309.47 Closing Price of 2007 348.39
2006

Closing Price of
247.45 Closing Price of 2009 139.58
2008

C.Staples

Closing Price of
664.00 Closing Price of 2007 664.00
2006

Closing Price of
396.00 Closing Price of 2009 501.00
2008

Telecomm.

Closing Price of
1,058.25 Closing Price of 2007 1,199.03
2006

Closing Price of
351.13 Closing Price of 2009 454.69
2008
b. Graphs

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


c. Sources and References

Sno Website
1 http://en.wikipedia.org/wiki/Dubai

http://hubpages.com/hub/FINANCIAL-CRISIS-IN-DUBAI-REASINS-AND-
2
EFFECTS

http://blogs.telegraph.co.uk/finance/louisearmitstead/5829577/Dubai_finally_r
3
eveals_its_financial_position/

http://business.rediff.com/slide-show/2009/nov/27/slide-show-1-dubai-shock-
4
why-it-happened-how-it-hits-india.htm#contentTop

http://seekingalpha.com/article/175772-the-potential-impacts-of-dubai-s-
5
financial-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