Credit Analysis and REsearch (CARE) Ltd

4th Floor, Godrej Colisuem,

Somaiya Hospital Road,
Off Eastern Express Highway,
Sion (East),Mumbai - 400 022
Phone: +91-22- 6754 3456
Fax: +91-22- 6754 3457

December 1, 2009

DUBAI FINANCIAL CRISIS: LIMITED IMPACT ON THE

INDIAN ECONOMY

The Backdrop
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, last
Wednesday. 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. Dubai World’s activities form a dominant part of the country’s economy and the
inability of the government to undertake the servicing of its largest enterprise points to
economic problems in the country.
Composition of UAE economy:

Others Sectoral composition of GDP of Dubai Real estate and

Dubai construction
15%
29% Trade and entreport
9%
23%
Financial services
17%

Others services
9% including retail
Abu Petroleum related
11% 31%
Dabhi
56% Others

Graph 1- Source: Emerald insight Graph 2-Source: CARE, Emerald insight

Dubai plays a crucial role in the economy of the United Arab Emirates (UAE), a
confederation of seven emirates. As Graph 1 indicates, Dubai’s contribution to the
UAE’s Gross Domestic Product (GDP) is around 29%. Moreover the Emirate has fast
emerged as the services hub of the region. The services sector of Dubai contributes
about 60% of the services sector of UAE by value and nearly a fourth of the total GDP of
the confederation. Within Dubai, services contribute 74% of the GDP. The most
prominent service-oriented sectors are real estate and construction (23% of Dubai’s
GDP), trade and entreport (31%), financial services (11%), and other services include
retail (9%).
Implications on the Indian Economy
Importance of UAE as an Export destination:
In recent years, UAE as an export destination for Indian products has increased
significantly in importance. The share of UAE in India’s total exports which was just
2.6% in FY04 has increased to 13.1% in FY09. In FY09, UAE was India’s second largest
export destination after China.

SHARE OF UAE IN INDIA'S TOTAL EXPORTS

14
13.1
12

10 9.5 9.6
8.8 8.3
8
6

4
2.6
2
0
FY04 FY05 FY06 FY07 FY08 FY09

Graph 3 – Source: Economic survey 2008-09;

* refers to April-February

Among the sectors which have a significant portion of their exports going to UAE are
Gems and jewellery (38.38% of total Gems and Jewellery exports), processed petro
products (17.53%), man-made yarn fabrics (16.34%), Rice Basmati (29.4%) and Non
ferrous metals (17.42%).

Graph 4: Export exposure of key sectors

2
 120

100

80
Rest of world
60
UAE
40

20

0
Gems and Petro- Manmade Rice Non fer
Jewellery products yarn Basmati metals
fabrices

Source – Ministry of commerce, Government of India

Limited sectoral impact due to nature of the UAE market

An important characteristic of the export demand to UAE is the low proportion of

internal consumption of Indian goods within the seven emirates themselves. This is
mainly because most of the increase in exports to UAE has been due to the significance
of the Dubai port as an entreport to the region and the emergence of a vast organized
retail segment sustained by large tourist inflows.

In the Gems and jewellery segment for example only a very small portion of the Gems
and jewellery sales from India are consumed internally. Some particular segments like
jewellery are dependant on the tourist driven retail sector. Domestic recession may not
have a direct impact on tourist inflows as the same is dependant on the economic
conditions of the source countries. Hence while the gems and jewellery segment will be
impacted, the impact will be limited.

As mentioned earlier Dubai port has emerged as an entreport for the region. An
example is that of the petroleum products segment which has accessed the middle-
eastern markets increasingly via the Dubal port. An economic crisis may lead to cost
cutting at the ports level, but the lack of a comparable port in the region would mean
that demand for port services would at least in the near term continue to be strong.

3
Hence the overall impact on Indian exports would be limited to the extent of the small
size of the UAE market.

The impact of the crisis on the wider Indian economy however appears quite limited
due to the strong revival in domestic demand in certain sectors witnessed recently and
the relatively weak link between economic activity in UAE and general world demand
for Indian products.

Capital flows and remittances:

% share of UAE in key capital and remittances

14 13
12
10
8 6.9
6
4
2 1.4
0
Remittances FDI Portfolio

Graph 5- Source: DIPP, CARE

As reflected in graph 5, UAE has not emerged as a significant source of foreign direct
investment in the country. While the region contributes about 7% of portfolio
investments, the crisis may not affect institutional inflows significantly. In fact there
could be a rechannelization of capital flows from the Gulf to more stable emerging
economies like India.

One area which could be significantly hit by the crisis could be net invisible flow into
India. About 12% of inward remittances into India in FY09 were from the UAE.

4
Remittances or permanent transfers by Indian expatriates to relatives in India have been
an important component of net invisible flows in the current account. In the first quarter
FY10 they formed 45% of net invisibles. In recent years, invisible flow has been the
crucial stabilizing factor for widening trade deficits experienced by India. About 40% of
the population of UAE is made up of Indian expatriates or people of Indian origin. The
employment consequences of an economic recession will impact the disposable flows
available to private transfers to some extent. Consequently this could be a source of
pressure in the current account balance.

UAE also forms an important source of Non resident Indian deposits which are
repatriable. Net inflows in NRI deposits showed a strong revival in FY09, partly due to
higher interest rates in India vis-à-vis other major source countries. The crisis may
however not have a significant impact on the deposits as it would on remittances. In
fact uncertainty over the financial sector in the Gulf, interest rate differentials with
advanced economies and relative strength of the Indian banking sector could cushion
the negative prospects of a pull out in the near term.

Conclusion:
With UAE showing intent in lending money to banks operating in Dubai to avert a run
and possible financial turmoil, the situation seems to be in control. Overall given the
nature of the UAE market as an entreport and tourist oriented retail market, the overall
impact on Indian industry should be extremely limited. The overall contribution of the
region in foreign investment flows is small and no significant impact on portfolio
investments can be discerned. Overall the impact on India is not expected to be
significant in the long term.

- D.R. Dogra, MD & CEO, CARE Ratings.

5
We would be p leased to add ress your queries, suggestions or feedback at med ia@carerating s.com
Regards,
Media desk
CREDIT ANALYSIS & RESEARCH LTD.
4th Floor, Godrej Colisuem,
Soma iya Hospital Road,
Off Eastern Express Highway,
Sion (East), Mumbai - 400 022
Phone: +91-22 - 6754 3456
Fa x: +91-22- 6754 3457
www.carera tings.com
E-mail: media @ca reratin gs.com

About CARE
Credit Analysis & REsearch Ltd. (CARE), promoted in 1993 by some of the leading Indian banks and
financial institutions including Industrial Development Bank of India (IDBI), Canara Bank and others is
amongst the premier credit rating agencies in India and provides credit rating, research and information
services.
CARE Ratings is well equipped to rate all types of debt instruments including Commercial Papers, Fixed
Deposits, Bonds, Debentures, Hybrid Instruments, Preference Shares, Loans, Structured Obligations,
Asset Backed Securities, Residential Mortgage Backed Securities etc.
CARE Ratings have evolved into a valuable tool for credit risk assessment for institutional and other
investors and over the years, CARE has increasingly become a preferred rating agency.
CARE Ratings has completed over 6,256 rating assignments having aggregate value of about Rs. 18,248
billion (as at June 2009), since its inception. CARE is recognised by Securities and Exchange Board of
India (SEBI), Government of India (GoI) and Reserve Bank of India (RBI).

Disclaimer
This Newsletter is published by Credit Analysis & Research Ltd. (CARE) and is for private circulation only. Nothing
contained in this Newsletter shall constitute or be deemed to constitute an offer to sell/purchase any security or as
an invitation or solicitation to do so for any securities of any entity. CARE has taken due care and caution in
preparing this Newsletter. Information has been obtained by CARE from sources it considers reliable. CARE does
not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or
omissions for the results obtained from the use of such information. CARE especially states that it has no financial
liability whatsoever to any user on account of the use of information provided in this Newsletter.