dubai crisis: after tremor of sub prime crisis

8/14/2019 dubai crisis: after tremor of sub prime crisis

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ABOUT DUBAI REASONS OF DUBAI CRISIS IMPACT OF SUB PRIME CRISIS ON MIDDLE

EAST IMPACT ON DUBAI BEGINNING OF CRISIS LINK BETWEEN TWO CRISIS CONCLUSION MAJOR IMPACTS OF DUBAI CRISIS ON ITSELF LESSONS FOR DUBAI CRISIS



§Located at the cross-roads of Asia, Europe andAfrica

§Dubai is well positioned to attract tourists

§Sunshine, shopping, seaside, sports and safety -five of the key ingredients that have earnedDubai a growing reputation as one of the world's

most attractive and rapidly developing leisuredestinations.§

§Trading and commercial hub of the MiddleEast§



§ Dubai was another fallout of the global real estate bubble

§ With global financial markets plunging after Dubai World, the

government investment company burdened with $59 bn

liabilities, requested for deferment of debt to its creditors for six

months, on 25th Nov 2009.

§ Nakheel had a debt of $26bn[ $3.5 bn islamic bond due to be paid

on 14th Dec 2009.

§ The Dubai government’s total debt is estimated at $80 bn.

§ Indian stock markets also plunged with heavy selling witnessed in

banking, infrastructure and realty stocks.



After 2003- Dubai economic model- More debt & less equity. Advantage of

◦ Political and economic openness,

◦ Better infrastructure,

◦ Trade mark of regional and world business hub.

FDI invited-◦ Invested in real estate-Infrastructure,

◦ Tourism- airway

◦ Trade

Mismatch between demand and supply.

Dubai has accrued debts of approximately US$85-100 billion, or around 200% of GDP.

Government restrictions were low.

Lax lending standards and low interest rates.



Dubai’s main development engine- Dubai world and its real estatearm- Nakheel

Issued Nakheel bonds- investors ready to invest as it was stateowned

Today many bonds are due and cash flows not enough to pay them back.

◦ Restructuring effect-◦ It has a reported US$60 billion in liabilities, offset by a

calculated US$40 billion in assets

◦ There is a maturity mismatch- the expected revenue is in thefuture while liabilities, including to contractors and

suppliers, are piling up today.



HOW?



The real estate big boom began in 1999 whenproperty market was opened to investorsfrom outside the Gulf Co-operation Councilcountries.

Properties prices kept on increasing at breathnecking pace. Speculative money moved inand drove the price beyond normal people

reach. Higher prices ensured more supply of real estate and ‘Oasis’ started to become amirage for the normal people.

The dream run of Dubai crashed when the

Global Economy went tumbling down due tosub rime crisis.



In a journey to become world flashy city state ownedcompanies accumulated debt of over $80 billion. Thedebt was 126% of the GDP of Dubai. Of this staggeringamount of debt Dubai World the state owned companyhad $60 billion of debt.

World’s top bank had exposure in the short term paper of the Dubai World. So any sort of default was sure tosend tremor to the fragile financial market.

The fall was because of the delaying the date of repayment of $3.5 billion sukuk bond that is due on14th December, 2009. The bond was issued by Nakheela branch of Dubai World. The announcement irritatedthe investor and they triggered the panic button.

The crisis in Dubai triggered sell off across the world



Friday November 27 2009

Dubai sends markets into turmoil



Some analysts see the Dubai fiasco from a historicalangle; to them, the causes of Dubai turmoil werenoticed the moment Sheikh Mohammad Al-Maktoum, its ruler, took the decision to invest his,as also the Emirate's, wealth in US real estatemarkets through the foreign arm of Emaar; thesecond largest property developer in Dubai.

The company ultimately went bankrupt, extendingthe US subprime crisis to the Emirate.

The Washington DC and Abu Dhabi connection has

pressured Dubai to join the "internationalcommunity" in taking a tougher stance againstIran, which is one of the main trade partners of the Emirate.



The Dubai fiasco reveals that the impact of the global financial crisis is not completelyover, which started in September 2008 withthe bankruptcy of Lehman Brothers, affecting

flow of funds to developing markets likeDubai. Valuation of assets like real estate gothit. At the same time, rise in the interestrates because of the liquidity crunch affected

viability of many projects.



1) Impact on Banking.:-

§

Those banks which provided finance to various projects are feeling pinch of Dubai crises .

§ Understandably their shares have fallen since.

2) Fall in real estate prices:-

§ Building dream projects like the Palm shaped islands, a new urbanmetro, the world's largest tower, a waterfront to the size of HongKong, a leisure park called 'Dubai land‘.



3)Layoffs:-

§ The already reeling construction industry is seeing amajor freefall. Laborers are asked to go home and

whatever little construction projects were on the anvil,are shelved.

§

4)Drop in demand of Gold:-

§ Dubai does not produce Gold on its own, it seeksexports from countries like India and re-exports themto other countries.



5)Immediate drop in oil prices:-

§ There was slight drop in oil prices as oil contributes to 6 % inDubai economy.

§ This crisis is a setback pushing Dubai to rely more on oil revenue.Dubai has to pump more oil out to finance its debt. andas OPEC is not expected to increase the production quotas,expecting oil prices to go even lower.

§

6) Depreciation in Dirham:-

§ The valuation of AED (The local currency of Dubai) saw a drop.This means the strengthening of the Dollar, by a bit.



§ Diversification is not just a buzzword§

§ Debt does matter ... Eventually

§

§ Foreign investing can be risky



“Destroyed the confidence between borrowers andlenders and it has also shaken the confidence about the

pace of a global economic recovery."

dubai crisis: after tremor of sub prime crisis

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