Dubai under scrutiny after debt payment delay

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Dubai under scrutiny after debt payment delay

BBC Business News

Dubai World has fuelled the emirate's rapid economic growth of recent years

Dubai's financial health has come under scrutiny after a major, government-owned investment company asked for a six-month delay on repaying its debts. Dubai World, which has total debts of $59bn (£35bn), is asking creditors if it can postpone its forthcoming payments until May next year.
Dubai World has also appointed global accountancy group Deloitte to help with its financial restructuring.
The company has been hit hard by the global credit crunch and recession.
It was due to repay $3.5bn of its debts next month.

Put simply, everyone in the markets thought that, in the end, the federal government in Abu Dhabi would stand by all of Dubai's bad bets. Apparently, they won't.

Stephanie Flanders, BBC economics editor

Dubai: Too big to fail?

The request for a delay in repayments led to major credit ratings agencies downgrading a number of state-backed companies.
Following six years of rapid growth, the Dubai economy has slumped since the second half of 2008.
This has led to Dubai property prices falling sharply.
'Shocking'
The Dubai government said in a statement that the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.

ANALYSIS
Ben Thompson, business reporter, Dubai
Financial markets and businesses are closed here for the Eid holiday - some suggest that's why the announcement was made when it was.
It's sparked real shock that things have come to this. Just 12 months ago, few could have believed the city would find itself asking for this lifeline. It seems Dubai is now paying the price for living on borrowed money.
Of course, everyone knew the boom couldn't last forever, but no-one expected it to collapse when, or as suddenly, as it did. Property prices have more than halved over the past year and investors have fled.
The official figure for Dubai's debt is $80bn, but talk to anyone here and the feeling is the figure is much higher. Unpaid bills, abandoned cars and empty buildings are all too obvious. Some analysts put the real figure at close to $160bn.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations," said analyst Shakeel Sarwar, of SICO Investment Bank.
Dubai is one of the seven self-governing emirates or states that make up the United Arab Emirates.
Analysts say the Dubai government has paid the price for a flamboyant economic model centred on foreign capital and giant construction projects.
Questions are now being raised about Dubai's ability to repay its debts, said the BBC's Middle East correspondent Jeremy Howell.
Some have speculated it is likely to turn to the more economically conservative Abu Dhabi emirate to bail it out.
Global credit rating agency Standard & Poor's, which rules on a company's or government's ability to repay its debts, said the announcement "may be considered a [debt] default".
Our correspondent said: "Standard & Poor's and Moodys immediately downgraded all six state-backed corporations in Dubai, downgrading some to junk status."
Junk is the term commonly used to describe bonds that are rated below investment grade by ratings agencies.
The Dubai World announcement was made on the eve of the Eid al-Adha Muslim festival, which will see many government agencies and companies close in Dubai until 6 December.

 

[LazyDog]

Inabidi kufuatilia News kuona wapi panatikisika kung'amua mapema mabadiliko yanayojiri.

 

[Lole Gwakisa]

Dubai"s breathtaking economical strides were almost too fast to be sustainable.

 

[BAK]

Jamaa walikuwa wanakopa tu bila break sasa zinawatokea puani. Wameathiri sana stock exchange nyingi duniani tangu ilipofahamika kwamba hawana ubavu wa kulipa deni lao la $60 Billioni mwezi ujao na kuomba ahueni hadi May, 2010.

 

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US shares slide over Dubai fears

BBC Business News


What went wrong in Dubai

Dubai does not have the enormous oil wealth enjoyed by its neighbours such as Abu Dhabi. Its main
source of wealth has historically been as a port.

In recent years it has sought to make money from property development and luxury tourism, building impressive hotels such as the Burj al-Arab.

The global downturn left many financial workers unemployed. The population fell an estimated 17%, meaning there was little demand for new properties.

There was also less demand for luxury holidays. Dubai companies have borrowed money to fund huge building projects such as "The World" and are now unable to repay it.

There are jitters on financial markets about who lent all the money. European banks are estimated to have lent more than £50bn to the whole of the United Arab Emirates.

Dubai state-backed companies may also have to sell-off some of their assets overseas such as luxury property in London and the Turnberry golf course in Scotland.


US shares have opened lower on worries about Dubai's debt problems, with the Dow Jones index down 126 points, or 1.2%, at 10,338.49. It was the first chance for markets in the US to react to news that state-owned Dubai World had asked for more time to repay its debts.
US markets were closed for a holiday on Thursday when other world markets suffered steep losses.
However, the main European markets recovered from earlier falls.
The main share indexes in the UK, France and Germany had all fallen by more than 3% on Thursday. But after falling further in early trade on Friday, the UK's FTSE 100 closed up 1%, and both Germany's Dax index and France's Cac 40 were up more than 1%.
Earlier in Asia, Japan's Nikkei index had closed down 3.2% and the Hong Kong Hang Seng ended 4.8% lower.
UK Prime Minister Gordon Brown described the fall in the markets as a "setback" but said it was "not on the scale of previous problems".
"The world financial system is stronger now and able to deal with the problems that arise," he told reporters on his way to a Commonwealth leaders summit.
Holiday hiatus
Dubai World is the centrepiece of the Gulf state's economy. David Buik, senior partner at BGC Partners, said: "You can't just say to the world: 'I don't want to pay my debts'. There is no income coming in from any of these properties. I think this is shocking PR."
The news shook markets that are recovering from the collapse of the US housing market and contagion that threatened to rupture the global financial system last year.

Certain London-based hedge funds who had bet on Dubai World being bailed out could have an uncomfortable few weeks ahead

Stephanie Flanders BBC Economics Editor

Read more from Stephanie
Peston: British banks and Dubai
What spoiled the party in Dubai?

It was the timing of the announcement as much as the lack of clear information that heightened nerves. The first news emerged late on Wednesday, as the Muslim world was preparing for its Eid celebrations.
It also coincided with the closedown of the world's most important share market, with US markets winding down for Thursday's Thanksgiving holiday.
Uncertainty of the scale of banks' exposure to Dubai hit banking shares at first. However, bank shares recovered strongly throughout Friday morning.
Threat to confidence
The biggest underlying fear is that Dubai's problems could reignite the international financial turmoil of the credit crisis.

WHAT IS DUBAI WORLD?
The emirate's flag bearer in global investments
Has a central role in the direction of Dubai's economy
Assets include DP World, which caused a storm when trying to take over six US ports
Property arm Nakheel built The Palm Islands and The World developments

What is Dubai and who runs it?
Dubai views: 'The end of the dream'
Send us your comments

Chris Skinner, chairman of the Financial Services Club, said: "We're very heavily interlinked. Dubai is the key financial centre in the Middle East."
Any knock to economic confidence could lower global demand for a whole range of commodities, including oil.
Oil prices dropped sharply. US crude fell about 5% to $73.64 a barrel and London Brent Crude was down $1.56 to $75.31.
Dubai, which has less oil money than many of its neighbours, became a trading and tourism hub with global ambitions.
Dubai World, the conglomerate that led the emirate's expansion, had $59bn (£36bn) of liabilities as of August, a large proportion of Dubai's total debt of $80bn. Its subsidiary Nakheel was the builder of the landmark palm tree-shaped island developments off Dubai.

 

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Furious investors warn troubled Dubai it will 'never raise a penny again'



Hopes Abu Dhabi will ride to the rescue of troubled state as experts fear crisis could plunge world back into recession

• Elena Moya, David Teather, Heather Stewart
• The Observer, Sunday 29 November 2009

Furious bondholders have arranged emergency talks with Dubai officials this week in an effort to get some clarity on the financial health of the state-owned company Dubai World, which caused widespread panic on world markets last week when it asked creditors for a six-month standstill on debt repayments.


A conference call has been organised by the New York-based hedge fund QVT Financial, after an attempt last week was abandoned when the telephone system collapsed under the weight of calls.
Investors are angry that the announcement was made at the start of the Islamic Eid and US Thanksgiving holidays, leaving them in the dark for days. "They won't be able to raise a penny again from the international investment community," one hedge fund manager said.

Dubai World, which owns assets including the former British ports business P&O, as well as luxury store Barneys in New York and was the main developer behind some of the state's grand property schemes, stunned markets with the announcement last Wednesday. The company is shouldering some $60bn (£36.5bn) in debt and was due to repay around $4bn next month. There are fears that the debt crisis in the towering city state could fracture the fragile investor confidence that has been built in the past few months and plunge the world back into recession.

As well as putting the frighteners on stock market investors who had been betting on a "V-shaped" bounce out of recession, Dubai's crisis has turned the spotlight on other countries that could struggle to repay their hefty debts.
Danny Gabay, director of City consultancy Fathom says Latvia, Greece, Ukraine and Hungary, which all face severe fiscal problems, are "on the front line," in the battle to avoid a government debt crisis in the future.

Vulture funds are circling Dubai and buying up distressed bonds, which could put further pressure on Dubai World to dispose of assets in a fire sale.
Initial fears of a meltdown appeared to be receding on Friday, with the FTSE 100 rising 51.6 to 5245.7, although the Dow Jones Industrial Average fell 1.5% to 10309.9. "I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. "I think balance sheets have healed enough to withstand a shock like this."

British banks appeared to be most at risk if Dubai World cannot pay its bills. HSBC and Standard Chartered could face losses of $611m and $177m respectively, according to early estimates from analysts at Goldman Sachs.

Attention will now focus on neighbouring Abu Dhabi, the oil-rich emirate, which is under pressure to mount a bailout. Analysts were this weekend speculating on what it might demand in return, including profitable assets such as the ports division, DP World, and the airline Emirates. Abu Dhabi is virtually debt-free and has a sovereign wealth fund with up to $500bn in assets.

The crisis in Dubai will also put pressure on the region to provide more transparency to investors. "The lines between public and private business have always been blurred in the Middle East, the irony is that it takes a crisis like this to reveal what commitment, guarantees and cross liabilities there are," said Jan Randolph at IHS Global Insight.