Just three days before Eid, the Dubai government's announcement seeking a six-month reprieve on debt repayments sent shockwaves through the world markets, as it raised doubts over the Gulf emirate's ability to meet its financial obligations.
Global markets, which have yet to come out of the financial crisis that savaged many an economy, reacted sharply and sank like a rock. Analysts now wonder whether they are witnessing the beginning of the biggest sovereign default since Argentina in 2001.
Questions are also being raised on Dubai's status as a major destination for international investment.
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.
So how will this affect India and why did the crisis happen
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.
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 Sun Never Sets on Dubai World' is the corporate slogan of Dubai World (a state controlled enterprise). However, that may no longer hold true.
gossip spread through the world like wildfire hitting the emirate's property prices, credit rating agencies downgraded all Dubai government-related debt, billions of dollars were lost by investors as the value of their investments in the Gulf emirate plummeted, oil prices began to fall, some currencies saw a steep slide, and the stock markets the world over were revisited by that all-too-familiar sinking feeling. Billions of dollars of investor wealth was wiped out before anyone could blink.
Dubai saw property prices falling by almost 50 per cent from their 2008 peak. The property bubble had already begun to burst, but with this latest shock real estate will be devalued even more.
However, many say that it might be too early to write Dubai off. Its oil-rich neighbour Abu Dhabi will bail it out to some extent.
However, Indian bankers and economists say that the Dubai debacle would not have much of an impact on India as Indian banks do not have much exposure to the Dubai real estate markets.
Notwithstanding the UAE being India's top destination for exports, the government put up a brave face stating financial concerns in Dubai would not impact the Indian economy and the country's real estate sector.
"I don't think," said Commerce and Industry Minister Anand Sharma when asked whether the confidence erosion in Dubai would have ripple effect in India.
Sharma said the Indian economy is large and "I don't think developments in real estate sector in Dubai are going to impact it. Besides, the Indian real estate is doing well," he said.
The UAE, which has a large Indian population, is the country's largest export destination with shipments of about $24 billion in fiscal 2008-09.
Asked whether exports to the Middle East could be impacted, Sharma told reporters, "I hope not."
ICICI Bank says no material exposure to Dubai corporates
Delhi-based Oriental Bank of Commerce also said the bank does not have any exposure in Dubai.
"We have no exposure there," OBC Executive Director S C Sinha said.
The Indian finance ministry meanwhile said the financial crisis in Dubai, triggered by a slump in real estate, may not impact remittances sent by Indian expatriates in the Gulf.
"Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," Finance Secretary Ashok Chawla said.
India gets nearly a quarter of its total remittances from the United Arab Emirates.
Former RBI Governor Y V Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on the Indian remittances."
Finance Secretary Ashok Chawla, however, said it will take some time for the Finance Ministry to examine the exact impact of the crisis on the Indian economy.
"We have seen the press reports. We will have to study what the issue is, what the problem is and what will be the possible implications, if any for the Indian economy, on the people, on the corporates. It will take some time for us to examine this," Chawla said.
The Reserve Bank India said it is examining the impact of the Dubai government's decision to suspend debt payments by Dubai World, which led global stock markets to tumble amid fears of widespread default.
Governor Duvvuri Subbarao said he has asked his officials to study the impact and "if necessary make recommendations."
"We shouldn't react to instant news like this. One lesson that we learnt from the (global financial) crisis is that we must study the developments and measure the extent of the problem and hence study the impact on India," said Subbarao, who attended an interactive session with the students of Indian School of Business in Hyderabad.
Global markets, which have yet to come out of the financial crisis that savaged many an economy, reacted sharply and sank like a rock. Analysts now wonder whether they are witnessing the beginning of the biggest sovereign default since Argentina in 2001.
Questions are also being raised on Dubai's status as a major destination for international investment.
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.
So how will this affect India and why did the crisis happen
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.
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 Sun Never Sets on Dubai World' is the corporate slogan of Dubai World (a state controlled enterprise). However, that may no longer hold true.
gossip spread through the world like wildfire hitting the emirate's property prices, credit rating agencies downgraded all Dubai government-related debt, billions of dollars were lost by investors as the value of their investments in the Gulf emirate plummeted, oil prices began to fall, some currencies saw a steep slide, and the stock markets the world over were revisited by that all-too-familiar sinking feeling. Billions of dollars of investor wealth was wiped out before anyone could blink.
Dubai saw property prices falling by almost 50 per cent from their 2008 peak. The property bubble had already begun to burst, but with this latest shock real estate will be devalued even more.
However, many say that it might be too early to write Dubai off. Its oil-rich neighbour Abu Dhabi will bail it out to some extent.
However, Indian bankers and economists say that the Dubai debacle would not have much of an impact on India as Indian banks do not have much exposure to the Dubai real estate markets.
Notwithstanding the UAE being India's top destination for exports, the government put up a brave face stating financial concerns in Dubai would not impact the Indian economy and the country's real estate sector.
"I don't think," said Commerce and Industry Minister Anand Sharma when asked whether the confidence erosion in Dubai would have ripple effect in India.
Sharma said the Indian economy is large and "I don't think developments in real estate sector in Dubai are going to impact it. Besides, the Indian real estate is doing well," he said.
The UAE, which has a large Indian population, is the country's largest export destination with shipments of about $24 billion in fiscal 2008-09.
Asked whether exports to the Middle East could be impacted, Sharma told reporters, "I hope not."
ICICI Bank says no material exposure to Dubai corporates
Delhi-based Oriental Bank of Commerce also said the bank does not have any exposure in Dubai.
"We have no exposure there," OBC Executive Director S C Sinha said.
The Indian finance ministry meanwhile said the financial crisis in Dubai, triggered by a slump in real estate, may not impact remittances sent by Indian expatriates in the Gulf.
"Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," Finance Secretary Ashok Chawla said.
India gets nearly a quarter of its total remittances from the United Arab Emirates.
Former RBI Governor Y V Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on the Indian remittances."
Finance Secretary Ashok Chawla, however, said it will take some time for the Finance Ministry to examine the exact impact of the crisis on the Indian economy.
"We have seen the press reports. We will have to study what the issue is, what the problem is and what will be the possible implications, if any for the Indian economy, on the people, on the corporates. It will take some time for us to examine this," Chawla said.
The Reserve Bank India said it is examining the impact of the Dubai government's decision to suspend debt payments by Dubai World, which led global stock markets to tumble amid fears of widespread default.
Governor Duvvuri Subbarao said he has asked his officials to study the impact and "if necessary make recommendations."
"We shouldn't react to instant news like this. One lesson that we learnt from the (global financial) crisis is that we must study the developments and measure the extent of the problem and hence study the impact on India," said Subbarao, who attended an interactive session with the students of Indian School of Business in Hyderabad.
My View - It looks like it is surely going to be an important trigger because the reality is that the numbers are relatively large. These are not small numbers that we are talking of. We have to keep in mind that whenever any kind of a crisis begins to unfold, it starts off on a very modest note and it doesn’t look very damaging to begin with.
But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?
Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.
What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.
But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?
Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.
What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.
Talking about indian market - I do not think there will be a knee jerk reaction. I think the general feedback or what we are hearing from funds even today is this is not something to react to in India. There could be Indian specific factors going forward, which might affect the markets.
About Nifty - we have to keep in mind that going forward unless we see any major global trigger, I think this is a kind of a market which will continue to play between 4,500 to about 5,200 for the next several months till we kind of start factoring-in things like the budget or reforms or the next earnings season. I think till that point of time we will have to kind of look at this kind of a trading range.
Impornat area of consern is credit growth is not picking up at all this year, it is running in single digits, clearly tells us that corporate capex is not picking up despite so much of improvement in the market, sentiments, talks about pickup in economy etc. Whenever corporate capex doesn’t pickup, it shows up with a lag on the broad economy a couple of quarters down.
So I think the downside can be deeper than 4,500.
So I think the downside can be deeper than 4,500.
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