A Brief Review: Dubai Crisis
Introduction
Dubai Crisis that unfolded on the end of November has brought to the front fears that many people had about the financial crisis and the after effects. Dubai, predominantly oil producing nation, about a decade ago was aspiring to move away from the oil business as it felt a need to diversify into other avenues. Dubai plays a pivotal role in the Emirate’s economic growth. It started investing into highly diversified spectrum of industrial segments around the world. This was done primarily through its investment agencies, one of which was Dubai World. It invested heavily into various countries taking huge exposure from banks and institutions around the world.
Dubai’s portfolio comprises some of the world’s best known companies and a number of outstanding projects. This includes DP World, one of the largest marine terminal operators in the world; Drydocks World & Dubai Maritime City designed to turn Dubai into a major ship-building and maritime hub; Economic Zones World, which operates several free zones around the world including Jafza and TechnoPark in Dubai; Nakheel, the property developer behind iconic projects such as The Palm Islands and The World among others; Limitless the international real estate master planner with current development projects in various parts of the world; Leisurecorp, a global sports and leisure investment group, reshaping the industry by unlocking value across investment, development and brand opportunities; Dubai World Africa which oversees the regional development and portfolio of investments in the African continent; and Istithmar World, the group’s investment arm that has a global footprint in finance, capital, leisure, aviation and various other business ventures.
Dubai World holding — DP World — operates Centerm, a container terminal in Vancouver’s inner harbour. DP World acquired the terminal when it bought the marine terminal assets of P&O Ports in 2006, and plans to spend $140 million to expand it. That purchase also gave it ownership of many key U.S. ports. In Britain, another Dubai World subsidiary, Leisurecorp, bought the Turnberry Resort in Scotland in 2008 — home to the 2009 British Open — for more than 50 million pounds. In the U.S., Dubai World’s investment arm, Istithmar World, bought the luxury retailer Barneys New York in 2007 for almost $1 billion US. There were reports earlier this year it was trying to unload the retailer as the luxury market unwound and Istithmar racked up big losses from the global financial meltdown, but Dubai World’s chair denied it.
Dubai World
It is a holding company of Dubai Govt., it operates a highly diversified spectrum of industrial segments and plays a major role in the emirate’s rapid economic growth. Its primary aim is to play the role of a growth engine that powers Dubai’s development both locally and internationally.
Dubai World’s investment includes:
- Transport & Logistics: DP World, Economic Zone World
- Drydocks World & Dubai Maritime City
- Urban Development: Nakheel, Limitless LLC, Leisurecorp
- Investments & Financial Services: Istithmar World, Dubai Multi Commodities Centre
- Dubai Natural Resources World
The Crisis
Dubai had borrowed $80 billion in a four-year construction boom that transformed the sheikhdom into a regional tourism and financial hub. After the Credit crisis and the fall of real estate prices around the world, Dubai suffered the world’s steepest property slump, with home prices dropping 50 percent from their 2008 peak.
Dubai World sought a “standstill” agreement to delay repayment on much of its $59 billion of debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. The Dubai government has although said that it is not a guarantor to loans made to Dubai World.
Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay debt payments a default. Fitch Ratings downgraded long-term issuer default ratings of Dubai-based Tamweel PJSC by three steps to BB, two levels below investment grade, and cut Taib Bank of Bahrain to BB from BBB-.
Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped 167.4 basis points to 776. The default swaps on Abu Dhabi rose 24.5 basis points to 184.5, Qatar climbed 17 to 131, Malaysia was up 13 at 117, Korea increased 11.5 to 114.5 and Greece was 3.5 basis points higher at 212.5, CMA prices show. The price of Nakheel’s bonds fell to 50 cents on the dollar from 71 cents yesterday and 107 cents a week ago
With the Credit crisis engulfing the entire world and the asset prices falling, it was inevitable that Dubai World incurred heavy losses, leading to the Dubai crisis, when it declared standstill on its debt payment. More than half of the construction projects in the United Arab Emirates, worth $582 billion, have been put on hold, according to the market research firm, Proleads. Some projects are still going ahead, thanks, in part, to the $10 billion bailout from the UAE’s capital, Abu Dhabi.
Dubai World
It is a holding company of Dubai Govt., it operates a highly diversified spectrum of industrial segments and plays a major role in the emirate’s rapid economic growth. Its primary aim is to play the role of a growth engine that powers Dubai’s development both locally and internationally.
Dubai World’s investment includes:
- Transport & Logistics: DP World, Economic Zone World
- Drydocks World & Dubai Maritime City
- Urban Development: Nakheel, Limitless LLC, Leisurecorp
- Investments & Financial Services: Istithmar World, Dubai Multi Commodities Centre
- Dubai Natural Resources World
The Crisis
Dubai had borrowed $80 billion in a four-year construction boom that transformed the sheikhdom into a regional tourism and financial hub. After the Credit crisis and the fall of real estate prices around the world, Dubai suffered the world’s steepest property slump, with home prices dropping 50 percent from their 2008 peak.
Dubai World sought a “standstill” agreement to delay repayment on much of its $59 billion of debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. The Dubai government has although said that it is not a guarantor to loans made to Dubai World.
Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay debt payments a default. Fitch Ratings downgraded long-term issuer default ratings of Dubai-based Tamweel PJSC by three steps to BB, two levels below investment grade, and cut Taib Bank of Bahrain to BB from BBB-.
Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped 167.4 basis points to 776. The default swaps on Abu Dhabi rose 24.5 basis points to 184.5, Qatar climbed 17 to 131, Malaysia was up 13 at 117, Korea increased 11.5 to 114.5 and Greece was 3.5 basis points higher at 212.5, CMA prices show. The price of Nakheel’s bonds fell to 50 cents on the dollar from 71 cents yesterday and 107 cents a week ago
Dubai Debt
United Arab Emirates (via Bank of America – Amortization figures only):
Total Debt: $184 billion
of which…
Dubai: $88 billion
Abu Dhabi: $90 billion
Dubai World:
Total Debt $26.5 billion
Due in next 36 months: ~$20.4 billion
Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World (arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007).
India & Dubai Relations
Around 4.5 million Indians work in Dubai. Most of them are forming ayahs, chefs, construction workers, industrial workers. These people are now in a great threat of losing their employment. India received $52 billion of remittances last year from UAE. UAE forms ~8% of India’s non-oil exports and 3.0-3.5% of India’s nonoil imports. DP World operates five container terminals in India, accounting for 40% of India’s container traffic.
Real Estate: Emaar-MGF and DLF-Limitless are the key alliances for investments into India. Sobha Developers had plans to build two residential towers and two hotels in the UAE.
Construction: L&T has two joint ventures in the UAE, others with business interests include Gammon India.
Banking: Bank of Baroda has 10 branches in the Gulf (largest), but mostly small banking exposure, mainly for remittances. Bank lending to UAE funded projects in India unknown.
IT Services: No material exposure. A few deals for Wipro and one for Infosys.
Aviation Industry: Istithmar World, Dubai world’s foreign investment wing, that holds a 13 per cent stake in SpiceJet.
Films: Dubai contributes a major 10 to 15 per cent for the international film market of Indian films.
Impact
UBS speculates that (among other possibilities) $80-90 billion (which is already over 100% of GDP) may be a low figure for Dubai’s debt and that significant “off-balance sheet” amounts might explain the restructuring attempt. Abu Dhabi’s Sovereign Wealth Fund (generally thought to command upwards of $500 billion) may have significantly less available (Rumors of $125 billion in 2008 losses abounded last year) investable funds.
Remittances from the Middle East account for about 25 percent of Kerala’s economy. 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. About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually
The possibility of default by Dubai world seems low, majorly because of the restructuring of the loans and the positive support given by the UAE government. The announcement specified that the restructuring process would not include non-real estate corporations such as Infinity World Holding, Istithmar World, and Ports & Free Zone World (which includes DP World, Economic Zones World, P&O Ferries, and Jebel Ali Free Zone).
There would be a limited direct impact of the crisis on India, but there would some damage in terms of remittances, unemployment and loss of business to Indian companies on a longer term because of reduced growth in the UAE region. There would be some losses for the banks involved because of the restructuring process.
The non-oil growth in GDP of UAE is now projected around 0 to 1 percent for the year 2009, and around 3 percent for 2010. Dubai amounts for around 40 percent of the UAE GDP indirect effects of the crisis. As Dubai World disinvests some of its assets externally, also postpones or delays some projects that it had internationally on the books, will lead to significant amount of losses.
The UAE Central Bank announced on November 29 to introduce a supplementary liquidity facility and to reaffirm that it stands behind banks in the United Arab Emirates has been very helpful, especially because these banks hold some of the Dubai World and the Dubai Government debt. Dubai World’s also announced to initiate a constructive engagement with its creditors and clarify the size and scope of the debt to be restructured had helped to reduce market uncertainty. Dubai World also indicated on December 1 that it would strive for equitable treatment of creditors—a move that expected to have a positive impact on the markets.
We believe that the worldwide decline in equities spurred by Dubai’s efforts to reschedule its debt is a sign that government spending alone won’t be enough to protect financial markets.
While it is too early to assess the implications of the Dubai World’s fallout, it is very likely that the recovery of Dubai’s economy will slow down, resulting in another year of slight contraction in the non-oil GDP. The UAE economy will take longer to bounce back, because of the following factors:
- Dented confidence and lowered reputation will affect equity valuations, risk premia, and access to international markets;
- Credit conditions will be more restrictive as a result of increased risk aversion; and
- Financial losses from restructured obligations will impact corporate and household balance sheets
While the direct financial effects on international banks appear to be contained, the exact implications of the event depend on how large a role the following variables play:
- Perceptions of risk in the Gulf Cooperation Council countries and quasi-sovereign debt markets;
- The potential sales of some Dubai World assets and consequent reevaluations of certain asset classes globally, especially commercial property; and
More broadly, the event is likely to have an impact on future risk assessments of quasi-sovereign entities—as well as the degree of transparency that investors demand. Investors will start to look more carefully at implicit guarantees.
Author: Abhijit Ahir, MBA (Finance) SIIB, Economic Analyst
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