The Dubai debt saga

Dubai, the paradise of investors, has mired all markets across the globe with its debt restructuring plans. The emirate of Dubai has external debts of about $80 billion, out of which, nearly 75% is owned by Dubai World, its biggest holding company.

In something that may turn out to be the biggest sovereign default since Argentina in 2001, the Dubai government has asked the creditors of Dubai World and developer Nakheel group to accept a moratorium on debt that runs into billions of dollars until at least May 2010 because of the crisis triggered by real-estate slump. According to a statement issued by the Dubai Financial Support Fund, "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to (agree to) a 'standstill’ and extend maturities until at least 30 May 2010.”
 
However, the government clarified that DP World, the world's fourth-largest port operator, and its debt would not be a part of the restructuring of Dubai World. As of August 2009, Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, had some $59 billion in liabilities, while Nakheel Properties, the world’s biggest privately held real-estate company, is also due to pay off about $3.50 billion in maturing Islamic bonds in December 2009.
 
Dubai World is closely related to all government-linked companies, following its high rise in a short period. At the same time, the company is also closely associated with the huge debt that has followed.
 
Earlier, in August, Dubai World hired an advisory firm to help it explore options to improve the financial position of its US-based luxury chain unit Barneys New York.
 
According to a news report from Al Jazeera, the emirate accumulated its debt as it expanded into the banking and real-estate sectors before the global financial crisis dried up available financing.
 
"Restructuring its government-linked debts is now a top priority as the government seeks to assure a rebound for its trade, tourism and services-focused economy and recover from the precipitous property crash,” the Al Jazeera report said.
 
Even for Nakheel, the developer who built the famous Palm islands, it would be difficult to repay debts due next month. With work on many of Nakheel's high-profile properties either slowing down or completely stopped, it still remains to be seen from where it would get the funds, other than a government bail-out, to repay its $3.50 billion debt maturing next month.
 
Indian construction companies, like Nagarjuna Construction Ltd and Simplex Infrastructure, with exposure to Dubai could thus witness project cancellations, and delayed execution and payment timelines.
 
"We believe Dubai exposure has long been discounted in (various) valuations. Strong order inflows and now, attractive valuations make NCC a good pick in our view. The event-based correction also presents a good opportunity to enter into L&T and Voltas, who will be relatively unscathed by the developments in Dubai," said Religare Capital Markets Ltd in a note.
 
The financial crisis in Dubai may not impact remittances sent by Indian expatriates in the Gulf country back to their home nation. India gets nearly a quarter of its total remittances from the United Arab Emirates (UAE). "Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this would have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," finance secretary Ashok Chawla told reporters in New Delhi.
 
Speaking with PTI, former RBI governor YV Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on Indian remittances."
 
Although the debt problems in Dubai are related to the real-estate market, mostly driven by supply rather than demand, it may not lead to sovereign default. In this context, it would be necessary to observe whether the situation in Dubai remains confined to Dubai World and Nakheel or if it escalates into a full-blown sovereign default. -Yogesh Sapkale [email protected]
 
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