An assignment on

Dubai debt crisis 2009 &

their impact on global Economy

Under the guidance & supervision Submitted by :

Of D.r. R.L. Chawla Shankarshan sudershan

Shahnawaz .A.S.

Shovit singh Section

–B
Sambit sen

Alin Ganguly

Deepankar kataria
 What is Dubai Crisis?
• The Dubai Debt Crisis 2009 has been called by economists a consequence of real estate bubble
burst when on November 26, 2009 Dubai proposed to delay repayment of its debt which
includes delay in the payment of $ 59 Billion debt on Dubai World, the investment vehicle for
the emirates for 6 months.

Dubai's Economy:

• Dubai has one of the most unique and unusual economies in the world. Dubai has numerous
free zones including Jebel Ali free zone, Dubai Maritime City, Dubai Internet City, and Dubai
Media City.
• Contrary to the general assumption that Dubai's economy is totally driven by oil and gas,It is a
fact that oil sector only comprises less than 6% of the economy of Dubai.
• In fact, Dubai's portion of natural gas revenues in the United Arab Emirates is only about 2%.
Dubai's oil production is estimated to be about 240,000 barrels per day.
• It is true that Dubai's economy was built on the back of Oil Money but Dubai's oil reserves
have diminished significantly and are expected to be exhausted in 20 years.
• The other largest contributing sectors of Dubai economy are Real estate and construction
(22.6%), trade (16%), (15%) and financial services (11%) (all are 2007 figures).

Diversifying to Real Estate:

• In 2000, Dubai Financial Market (DFM) was established. It was established as a secondary
market for trading securities and bonds, both local and foreign. During that time the
Government decided to diversify Dubai's economy from a trade-based, but oil-reliant, economy
to one that is service and tourism-oriented has made real estate more valuable.
• The orientation towards tourism and service led the economy towards Real Estate Boom and
the result was appreciation in the property prices from 2004–2006.
• Dubai became a center of large scale real estate development projects and this led to the
construction of some of the tallest skyscrapers and largest projects in the world such as the
Emirates Towers, the Burj Dubai, the Palm Islands and the world's second tallest, and most
expensive hotel, the Burj Al Arab.
• Thus Dubai landscape started changing. Earth movers crawled alongside massive cranes and
trailer trucks loaded with steel and concrete. The Dubai story began to unfold, rapidly.
• For many years, Dubai has been a safe haven for investors offering fantastic returns of 40%
plus per Annam and in recent years has attracted clients who have been trying to get on the
investment ladder.
However the ugly face of the so called "Dubai Model" which was based upon debt and
speculation, was hiding somewhere in the breakneck boom.

What is Dubai World?

• Dubai World is an investment company that manages and supervises a portfolio of businesses
and projects for the Dubai government across a wide range of industry segments and projects
that promote Dubai as a hub for commerce and trading.
• The chairman of this company is Sultan Ahmed bin Sulayem.
• Dubai World was established under a decree ratified on 2 March 2006 by Sheikh Mohammed
bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and
Ruler of Dubai. He also holds the majority stake in Dubai World.
• Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to
London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through
asset-management firm Istithmar PJSC.

Major Reasons : Seeds of Trouble

• Due to the ongoing global financial crisis of 2008-09, Dubai's real estate market experienced a
major downturn. This lead to the slowing economic climate.
• It was declared in an international press council by Mohammed al-Abbar who is senior aide to
Dubai's Ruler and UAE's Vice President/Prime Minister, Sheikh Mohammed bin Rashid Al
Maktoum and who serves as the Director-General of Dubai's Department of Economic
Development, and Chairman of Emaar, one of the world's largest real estate companies in
December 2008 that, Emaar had credits of US$ 70 billions and the state of Dubai additional
US$ 10 billions while holding estimated 350 billion in real estate assets.
• By early 2009, the situation had worsened with the global economic crisis taking a heavy toll
on property values, construction and employment.
• As of February 2009 Dubai's foreign debt was estimated at approx. USD 100 billion, leaving
each of the emirate's 250,000 UAE nationals responsible for 400,000 USD in foreign debt.
• A longer-term assessment of Dubai's property market showed depreciation; some properties
lost as much as 64% of their value from 2001 to November 2008.
• It contributed to the failure of key businesses, declines in consumer wealth estimated in the
trillions of U.S. dollars, substantial financial commitments incurred by governments, and a
significant decline in economic activity.

• In recent years, Dubai has expanded with ambitious, eye-catching projects like the Gulf's palm-
shaped islands and the world's tallest skyscraper in hopes of becoming a tourist-friendly Middle
Eastern metropolis. In the process, though, the state-backed networks nicknamed Dubai Inc.
have racked up $80 billion in red ink. The emirate may now need another bailout from its oil-
rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

The Burst of the Bubble:

1. Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, had borrowed $80 billion in a
four-year construction boom to transform the economy into a regional tourism and financial
hub.
2. This emirate in the due course of time suffered the world’s steepest property slump in the
global recession, with home prices dropping 50 percent from their 2008 peak.
3. Dubai world with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its
debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC.
4. Some analysts say that : The core reason for the Dubai Financial mess up is that Sheikh
Mohammed's decision to invest all his wealth as well as Dubai govt fortunes in Real estate
markets in United states through a foreign investment arm of Emaar,which claimed to be the
second largest property developer in US ,which ultimately went bankrupt due to recession and
filed for chapter 11. Chapter 11 is a chapter of the United States Bankruptcy Code, which
permits reorganization under the bankruptcy laws of the United States. (Chapter 7 governs the
process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the
majority of private individuals. )
5. Subsequently, Dubai shifted into crisis mode with its dangerous building boom stalled, its
lending bonanza vanished and government pondered wider steps to rescue banks.

Announcement of Official Moratorium:

On November 25, 2009, the Dubai government announced that the company "intends to ask all
providers of financing to Dubai World and its subsidiary Nakheel to 'standstill' and extend
 maturities until at least 30 May 2010". The company will also undergo a restructuring process
with the help of Deloitte consultants. Several months earlier, Dubai World accounted for a $59-
billion debt, nearly three-quarters of the emirate's US$80-billion debt. This includes a US$3.5-
billion loan which the company is unable to repay by its December deadline.

DUBAI DEBT CRISIS & THEIR IMPACT

1. Impact on British banks

• British banks appeared to be at most risk if Dubai World can't pay its bills. London-based
lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177
million respectively, according to early estimates from analysts at Goldman Sachs. Both have
substantial Middle East operations.

2. Impact on korea
• South Korea estimated the country's financial institutions have just $88 million in
exposure. Construction firms from Japan, Australia and South Korea behind Dubai's
recent development boom also might be on the hook.

3. US & citigroup
• Among U.S. banks, Citigroup Inc. had $1.9 billion in exposure to the United Arab
Emirates as of 2008, according to a JPMorgan research note. But it's unclear how much
of that was related to Dubai. Citigroup declined to comment.

4. Impact on japan

• In Asia, Japan's Sumitomo Mitsui Financial Group, the country's No. 3 bank, could be
exposed to Dubai World's indebted property arm at the cost of several hundred million
dollars, according to a person familiar with the matter.
1. Impact over commodity Market

• In the commodity market, crude oil tumbled to a six-week low as Dubai’s attempt to
reschedule its debt prompted investors to sell commodities.

• Gold dropped the most since January in London as gains in the dollar damped demand
for the precious metal as an alternative asset. Gold for immediate delivery dropped as
much as $50.28, or 4.2 percent, to $1,138.10 an ounce, the biggest intraday slide since
Jan. 12. The metal traded at $1,152.33 by 9:09 a.m. in London.

1. Impact over currency Market

• “In the currency market, Dubai debt fear continued to drive investors away from risks,

sending Asian stocks sharply lower while Yen soars, taking dollar higher with it. Investors are
clearly worried about the risk of contagion effect from Dubai which could trigger second
wave in the credit crisis.”

• The Nikkei 225 Stock Average index dropped 416.18 points or 4.38%, while the broader
Topix index has lost 27.7 points or 3.3%, for the week ended Friday, 27 November 2009.

In Mainland China, share market stumbled with all ten sectors tilted into red terrain, hit by
concerns over Dubai’s financials health. The shock from Dubai’s move to suspend payments
due on a slice of Government-backed debt spilled over the world market.

The Shanghai Composite Index, measuring A shares and B shares on the Shanghai Stock
Exchange, slumped 74.71 points, or 2.36%, to 3,096.26, meanwhile the CSI 300 Index,
measuring exchanges in Shanghai and Shenzhen, tumbled 2.96%, to 3,382.51.

In Hong Kong, the stock market plummeted as heavy selling triggered across the sector after
a weaker performance in mainland bourses and European markets and lower US index futures
on concern over losses stemming from Dubai’s attempt to reschedule its debt.
 In Australia, the share market plummeted with all round of selling across twelve sector,
sparked by meltdown in European stocks and other Asian bourses after ‘Dubai World’, the
Dubai government’s investment and development vehicle, said it would halt repayments for
up to six months on its nearly $60 billion in debt.

In New Zealand, benchmark index declined by more than 1% to end the last trading day of
the week in the negative terrain on Friday. The NZX50 declined 1.06% or 32.87 points to
3094.43. The NZX 15 lost 0.60% or 33.42 points to close at 5616.47.

In South Korea, stocks finished lower Friday as investors fretted over debt problems in
Dubai.

• In Taiwan, stock markets dumped their recent gains, following the fear of Dubai debt crisis
as Dubai World, developer of some of the glitziest properties on the planet comes up short on
repaying debt.
• The benchmark Taiex share index slumped to three weeks low on Friday, ending lower by
248.35 points or 3.21% in a day, closing at 7490.91, the lowest closing since 6 November
2009 when market finished the day at 7463.05

The BSE 30-share Sensex was down 222.92 points or 1.32% to 16,632.01. The S&P CNX
Nifty was down 63.80 points or 1.27% to 4941.75.

Elsewhere, Malaysia's Kula Lumpur Composite index finished lower at 1270.61 while stock
markets in Indonesia’s Jakarta Composite index gave up 68.01 points ending the day lower at
2393.45.

In other regional market, European shares pulled back from early lows on Friday, as
investors started to buy up shares in firms battered in the previous session by news that Dubai
is seeking to postpone repaying the debt of its corporate entity Dubai World. Regional share
markets were also off lows in Europe. The U.K. FTSE 100 index declined 0.3% or 13.72
points to 5,180, the German DAX index fell 0.2% or 12.76 points to 5,603 and the French
CAC-40 index lost 0.1% or 4.10 points to 3,675.

1. Impact over Banks

• The Dubai crisis could have a "meaningful impact" on banks across Asia, said Daniel
Tabbush, Asia banks analyst at CLSA in Bangkok, listing Standard Chartered, HSBC
and Singapore's DBS Group as the most exposed in the region.

• Shares in HSBC Holdings dropped more than 7 percent and Standard Chartered fell 6
percent. The London listed shares of the two lenders led the biggest tumble in European
bank stocks in six months on Thursday.

INDIA AND THE DUBAI DEBT CRISIS 2009

• As far as India is concerned, real estate sector and banking sector have some exposure
there, though not big enough to have much impact. But in case those Indians who are
working there, lose their jobs, then Indian job market may feel pressure. UAE is big
importer of Indian items; our exports may also suffer a bit.

• Economists call Kerala a ‘money order economy,’ precisely for the reason that every
third house in Kerala has a man working in the Gulf.

• 50 lakh Indians who work in the gulf, the Malayalee diaspora alone account for more
than 20 lakh and they bring in more than 25 per cent of the state's GDP as remittance.

• So if the markets crash in the Gulf the direct impact will no doubt be on the economy of
the state. Not just that the future of two of Kerala's multi-crore projects, the Smart city
 and the Vallarpadam Shipping Terminal is also uncertain as both have Dubai World as
partners.
• Still , there are strong linkages between companies in India and Dubai . There might be
some impact .However , The impact will only be on certain individuals and corporate
and will not be felt by the entire country .

• BOLLYWOOD woes .The market (Dubai) generates 40-45 per cent of the overseas
collections for Bollywood films .

• Dubai’s debt woes have got Bollywood producers and distributors worried as the city is
a significant contributor in the West Asian market for Hindi films.

Two reasons make Dubai important to Indian companies.

• One, Dubai is the hub of most traded commodities from pearls, gold and diamonds
to tea, cotton, basmati and sugar. More crucially, it is gateway to the Middle East. All
the top players in the region, especially Gulf Cooperation Countries (GCC), have a
presence there and use Dubai as a convenient and glitzy business centre to meet each
other and the outside world. So, to Indian companies Dubai epitomises their entire
Middle Eastern business, whether it is Saudi companies or Iranian traders.

• Dubai-based importers would reduce buyer’s credit because they will themselves
be feeling the squeeze as local banks hunker down. Trade finance will start drying up
because the liquidity crisis and higher risk will drive up interest rates on loans and
advances.

• Indian exporters will reduce open account sales where the goods are delivered
before payment is due because they are so risky. Intense competition may have forced
Indian exporters to make such sales in the past. Not any more. Right now their focus
will be on getting back the money they are owed.

• Nervous Indian banks will start demanding more documents and letters of credit
because this substantially reduces risks for both exporters and importers. You can bet on
documents meant for Dubai being scrutinised more carefully and higher rate of
rejection. Banks will also charge more for the same trade finance instruments because of
exploding counterparty risk. Currently, Dubai's credit default premium is on par with
Latvia.

• DLF, UNITECH, PARSHAVNATH Developers and Emaar MGF all said they have
no exposure in Dubai , while OMAXE said it has an investment of Rs 40 crore which it
has asked for refund.
 CONCLUSIONS AND FINDINGS OF THE STUDY

 Analysts expect financial support from Abu Dhabi, like Dubai a member of the United
Arab Emirates and home to most of the emirates' oil. But Dubai might have to abandon
an economic model that focused on heavy real estate investment and inflows of foreign
money and labour.

 Possible Role of Abu Dhabi as a Saver:

Meanwhile, experts feel that Abu-Dhabi's selective aid will give it greater say in Dubai's
affairs and financial activities.

1. Dubai asked Abudhabi to bail out from this crises.

2. Analysts However , it up to Abu Dhabi, the wealthy capital of the United Arab Emirates
how it would like to assist Dubai.

3. Are expecting Abu Dhabi (the senior and controlling Emirate in the UAE) to help soften
the blow of this crisis.
4.A recent report by HSBC confirms that Abu Dhabi has the cash liquidity to support its
own banks and property companies.

5.Therefore, Abu Dhabi is likely to use some of this liquidity and stability to help prevent a
complete collapse of markets in Dubai.

6.The UAE Central Bank has already confirmed that it´s board has discussed plans to launch
facilities for supporting real estate lending in Dubai, as well as in the rest of the UAE.

7.In Abu Dhabi, the wealthiest of the UAE's seven emirates and source of 90 percent of its

oil exports, the mood is harsher.

 RESERVE BANK OF INDIA Governor D Subbarao said: "We should not 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."

 Indian stock market lost over 600 points in initial trade, but recovered sharply and ended
the day with a 223-point loss as reassuring sentiments expressed by corporates, and
Commerce Ministries as also RBI helped control the erosion.
 Dubai economy accounts for roughly one third of UAE's GDP and this could mean that
a little over 3 per cent of India's total exports could be at risk, post-crisis, it said.
 Reserve Bank of India has said that the impact of Dubai financial crisis on remittances
cannot be ruled out as some part of the country are hugely dependent of Gulf nations for
remission.
 Most of the southern states are largely dependent on Dubai, with Kerala being the largest
recipient of remittances.
A QUICK SNAPSHOT **
“ It had taken loans from many financial institutions for developing Dubai. It spent a lot of
amount on developing real estate and now there are not enough buyers of those properties
because of global recession. Due to this the Company is not in a position to repay its loan
instalments. Since all those loans have been guaranteed by Dubai Government, Dubai
Government has requested the lenders to extend time for redemption. Total liabilities of Dubai
World are $60 Bn. It is not such a big amount to have a big impact on the world economy. As
far as India is concerned, real estate sector and banking sector have some exposure there, though
not big enough to have much impact. But in case those Indians who are working there,lose their
jobs, then Indian job market may feel pressure. UAE is big importer of Indian items, our exports
may also suffer a bit. “

THANKS ;