Sunday, November 29, 2009

The Dubai Debt Crisis: Undermining Investor Confidence?

As a more upscale version of the American subprime mortgage crisis that started in 2007, will the Dubai debt crisis not only undermine investor confidence but of the ongoing global economic recovery as well?


By: Ringo Bones


To all of us who still care about the overall health of our global economy, the Dubai debt crisis – like the US subprime mortgage crisis before it – unsurprisingly managed to go global by undermining overall investor confidence. Like the subprime mortgage crisis, the Dubai debt crisis can also trace its beginnings in the intervening years. Unfortunately, both had been already proven to readily spread to the world’s shares markets as fear and panic are the primary motivators of market speculators. Dubai’s decision to delay paying debts – i.e. refinancing – for 6 months not only made Moody’s downgrade Dubai’s credit rating but it also started to spook the global shares markets as soon as the press got word of it. Given the supposed financial risk involved, does the Dubai debt crisis create shares markets chaos largely disproportionate to the actual scale of the actual problem involved?

The Dubai debt crisis largely stems – according to financial experts – from its inflated portfolio of luxury properties plagued by cost overruns in their development that resulted in Dubai’s leading property developers to defer their debt obligations for 6 months. Thus making Moody’s – one of the world’s top credit rating agencies – to recently downgrade Dubai’s credit rating.

One of the surest investment options in Dubai is the property developer Nakheel. Famous for making the world’s largest man-made island – the Palm Jumeirah – a reality, Nakheel also boasts as the only property developer with its own in-house environmental assessment team. Nakheel’s apparent fiscal sensibility was shaken to its core after miscalculating the final cost by a significant margin of the development of the Palm Jumeirah island and its scores of 6-Star hotels. Delays in the return of investments / profits due to the still recovering global economy is the main reason why Dubai is currently experiencing their own version of the US subprime mortgage crisis.

Just over a year ago – back in November 20, 2008 – the lavish opening festivities / inauguration of Atlantis Hotel Dubai where the venerable global song and dance sensation Kylie Minogue got top billing would make it seem that Dubai’s current debt crisis seems like a fiscal and economic impossibility. State-owned Dubai World – the firm that made Hotel Atlantis Dubai and the lavish Palm Dubai inauguration party a reality was rumored to have spent 35 billion US dollars to make it possible. Ironically, a year or so later, the property development firm is asking for a government sponsored financial bailout.

The actual development cost oversight that led to the raising of additional capital which Nakheel has never commented publicly is probably one of the reasons why most of Dubai’s top businesses to elect debt payment deferment. Even at the cost of credit rating downgrade. Unfortunately, Dubai’s credit rating downgrade due to its debt obligation problems had resulted in a shares markets slowdown in the US and in Asia. Even Dubai's brother Emirate Abu Dhabi had even offered debt payment assistance to Dubai in order to minimize the chaos to the world’s shares markets Dubai’s debt crisis could create. With total debts at around 60 billion US dollars, Dubai’s current debt crisis is bound to create a significant chaos in the world’s shares markets. Let’s just hope that this is just a minor slump so that the world economy can fully recover soon, hopefully maybe in 2010.

7 comments:

Sherry Rashad said...

Looks like Takaful / Islamic Finance is still vulnerable to that most human of all frailties - hubris. Dubai's property developers - especially Dubai World, Inc. tried to develop too quickly not taking caution that the real estate and tourism business is very vulnerable to the global economic slowdown of the past year. With a downrated sovereign credit rating, Dubai will have to pay higher interest rates to pay its debts.
another countries that might experience similar problems with Dubai is the UK and Greece. Especially when the Greek shares markets has been recently hit hard over mounting government debts. As an EU member country, the debt problems of Greece could easily affect the UK shares markets as well.

Sans Ferdinand said...

I have a feeling that the actual damage that Dubai's debt crisis can inflict on the world's shares markets is largely overblown by panicky speculators. Dubai's ruler Sheik Mohammed also shares this sentiment. So does Ahmad Al Mansoori of the Al Mansoori Group, the crisis is largely overblown by the foreign media.
Morgan Stanley did warn of an impending UK debt crisis that could happen in 2010. And the Greek debt crisis is yet too early for a thorough risk assessment - or credit rating downgrade for that matter.

Ringo said...

As the property arm of Dubai World, I think Nakheel is still a good investment after the furor over the Dubai Debt Crisis had calmed down during these past few days. Although the long-term uncertainty over the profitability of Dubai World due to some financial advisers complaining / griping over insufficient transparency and due diligence has recently sent gold prices past the 1,200 US dollars per Troy ounce mark. And the potential debt problems of UK and Greece is something to watch out for since credit ratings are the be-all-end-all of bond holders.

Yvette said...

Having a diversified investment portfolio only makes sense if you are investing in credit worthy stock options. Nakheel - the property arm of Dubai World - was chosen by our local local mutual fund because it seems a good choice at the time, like a year ago. With the resolution of the Dubai Debt Crisis not yet in sight, it could well send everyone going for gold as a more sensible safe haven investment of choice. Even Goldman Sachs forecasted gold reaching 1,350 US dollars per Troy ounce before the year 2009 is over.

May Anne said...

With 3.5 billion US dollars worth of bonds due this coming December 14, 2009, I wonder if bond holders will get their dividends at the designated due date given the current debt crisis experienced by Dubai. Worse still, my mom's mutual fund has been investewd in the property arm of Dubai World - i.e. Nakheel. If things go bad, i could kiss my College education and doctoral thesis expense fund goodbye.

Je M'Apelle Ja'Nelle said...

Who knew that the real estate and property development bubble has a global reach - as opposed to just being confined to the United States in the form of subprime mortgage.
The panic over the Dubai debt crisis could be due to the debts of Dubai World, Inc. being designated as an ordinary business debt as opposed to a sovereign debt woth a government guarantee. Since the news of the Dubai debt debacle emerge, the value of Dubai's shares markets slid by as much as 12.5%. As of late Dubai's shares slid once again after Sunday's - December 6, 2009 - brief gains.

VaneSSa said...

Given my local investment club's guiding advise - which had worked for the 20 or so years they've been in business - goes as: "Stay fully invested, reinvest dividends and profits, diversify portfolios to spread risks, and learn how to identify undervalued stocks with long-term growth potential. Based on what I know so far, the greater threat faced by Dubai World, Inc. / Nakheel is not a credit worthiness downgrade by the world's leading credit rating agencies, but capital flight by panicky and risk averse investors