Dubai in Trouble

Information about Dubai remains scarce and worst still that the government of Dubai will be on holiday until 6 December in celebration of Eid and the UAE’s National Day. The $22bn of Dubai World’s external liabilities is an amount large enough to present a significant short-term risk on global credit market. It certainly forces investing community to re-think about the strength underpinning this global recovery.

Question is that will this event be the catalyst to a new ‘sub-prime’ scale as I have been hearing repeatedly that banks in Dubai seems to be well-capitalized and do not seem large enough to badly hurt the system.

Dubai World is the emirate’s largest state-owned conglomerate and operates in diverse businesses ranging from real estate to maritime services. Nakheel is a real estate development company, owned by Dubai World and best known for its Palm project. Essentially, on Wednesday 25 November, the government of Dubai authorized the Dubai Financial Support Fund to spearhead the restructuring of Dubai World’s liabilities. The holders of Nakeel’s $3.5bn bond maturing in mid-December are facing the immediate threat of delayed payment and about two-thirds of these bonds are held by international investors. The Dubai World intends to ask all providers of financing to ‘stand still’ and extend maturities until at least May 30, 2010.

What is seriously need a re-thinking is the presumption that the government would bail out Dubai World and its companies and need to assess the viability of Middle East even if Abu Dhabi is willing to support Dubai’s economy.

We have already seen a general risk aversion move with countries with financing issues being penalized heavily. Central banks have announced they intend to buy US dollars for the first time this year and the intensity of such intention is likely to intensify. Already, the United Arab Emirates’ central bank eased credit for lenders and the MSCI Emerging Markets Index lost 3.9% in two days after news broke. The cost of protecting Dubai government notes from default more than doubled to 647 basis points in three days.

Dubai, the second biggest of seven states that make up the UAE and its state-owned companied borrowed $80 billion to fund an economy boom and this ‘butterflies’ in the stomach will continue for at least new couple of weeks, if not more, until some kind of confidence is coming back to the system.

Dubai’s trouble could trigger a wider problem. For sure, we already seeing investors traditional sought safe habour in government bonds from the stormy waters of corporate bonds, now prove to be the safer bet, after all. Dollar and Japanese Yen are the alternatives while European and especially Asian markets and commodities will take the brunt of the losses. It could be the momentary setback, but do not ignore this as Dubai World woes resonating across financial markets.

In short, this is a wake-up call and the financial crisis that we are seeing since late December 2008 is far from over.