Thursday, December 17, 2009

Debt Laden Dubai - When Will The Woes End?

Fortnight ago Dubai World's request to its creditors for debt repayment restructuring plan had sent sentiments of global investors into a tizzy. In taking precautionary stance, global investors had exhibited an urgency to take cover at this slight bit of adverse news in global financial ecosystem. That amply indicates that risk taking appetite of global investors is surely on the wane. Otherwise, how do you explain a puny $ 26 bn expected default scaring the wits out of investors in South East Asia, across Indian Ocean to Europe and across Atlantic to the Americas?That's pandemic contagion, if you may!!

But why is the global investor getting spoofed so easily. Could it be that Dubai World episode portends destabilizing happenings in global financial ecosystem in days to come? Does Dubai World indicate that the cup of global financial woes is finally spilling over? Does Dubai epitomize the surreal world of tall dreams with borrowed money, whose nemesis is in offing? To get an answer to all that let us first understand the nuts and bolts of Dubai and Dubai World.

Dubai is one of the seven Emirates under the federal governance of UAE. It started off as a trade based oil-reliant economy but presently has turned itself on its head as a service and tourism oriented economy. This has been necessitated because of the belief that its oil reserve will last only twenty more years.

Dubai World is a state-owned conglomerate which deals in real estate, financial instruments and various other business ventures . Its real estate arm, Nakheel has to its credit the Palm Trilogy, three palm tree shaped man made islands, as also Burj Dubai, the tallest free standing 818m high man made structure being built. 'The World' is another extravagant real estate development project which aims at creating 300 islands off the coast of Dubai resembling the continents of the world. All such projects come at an exorbitant price and are insanely expensive for all parties connected with such projects.

It is estimated that the actual debt burden of Dubai's government-related-entities is 116% of emirate's GDP. That's what has prompted economist to put the tag of 'debt laden' to Dubai. Such a tag is also being put on fancied European countries like Greece and Spain. Many East European countries have also earned this sobriquet. So the global investor was spoofed not by the size of expected Dubai default, but that one sovereign default may trigger an avalanche of other sovereign defaults.

But now for some good news. Last Monday was pay time for Nakheel's bonds which had matured and the creditors could be paid off $4.1 bn. A bond default was avoided at the very last moment when Dubai's oil rich neighbouring emirate Abu Dhabi came to its rescue with $10 bn dole, like a knight in shining armour. This total sum of $10 bn will see off debt servicing requirements of Dubai World till April 2010. What after that! Will Dubai have to periodically stick out the begging bowl for servicing debt of its state owned entities?

To get an answer to that and more, do watch this space in coming days.