Dubai’s Investment Troubles Leave Markets Unsteady

Dubai’s Investment Troubles Leave Markets Unsteady

By BETTINA WASSENER
Published: November 27, 2009

HONG KONG — Stock markets fell across Asia on Friday as investors were spooked by news this week that Dubai World, the emirate’s main investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt.

Dubai, in debt from financing a building boom, is seeking to defer payments.

The Hang Seng index in Hong Kong fell 4.8 percent and South Korea’s key market gauge, the Kospi, dropped 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan both sagged 3.2 percent.

European markets, however, were flat, with the CAC 40 in Paris and the FTSE 100 in London turning a few points higher. The three major European markets all fell more than 3 percent on Thursday. Wall Street is expected to open sharply lower as investors there try to play catch up. American markets will be open for a half-day, after being closed Thursday for Thanksgiving.

The dollar gained against the euro, and crude oil prices fell $3.68 to $74.28 in premarket trading in New York. Treasury prices rose.

In the Asian markets, banks and construction firms were among the biggest losers, even as many companies issued statements declaring they had little or no direct exposure to the Dubai World debt.

European banks may be hit hardest if Dubai World cannot meet its obligations, according to a research note Friday from Credit Suisse. The Swiss bank estimated that European banks could have a total exposure of 13 billion euros.

Bloomberg News, citing a report by JPMorgan Chase and Company, said that the Royal Bank of Scotland Group underwrote more loans than any institution to Dubai World, the state company seeking to reschedule debt, while HSBC Holdings had the most at risk in the United Arab Emirates.

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in the report, citing Dealogic data.

The turmoil was touched off by Wednesday’s announcement from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow Dubai World to suspend its debt repayments for six months. European markets reacted negatively to the news Thursday.

Dubai’s move — the global high-finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its debt, worries about the sovereign debt of oil-rich Middle Eastern countries were unfounded.

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Still, the news had companies scrambling Friday as their stock prices dropped.

In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai World. Standard Chartered said it would issue a statement “if there was anything material to disclose.”

Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”

Chinese banking giants including ICBC, Bank of China and Bank of Communications said they had no exposure, Reuters reported, but their shares all dropped.

In Japan, Sumitomo Mitsui Financial Group fell 3.7 percent, Mizuho Financial dropped 3.9 percent and Mitsubishi UFJ 2.2 percent, though none would say how large their exposures were, according to Bloomberg News. Taiwan’s fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much.

Real estate and construction firms of varying sizes were also scrambling to assess the impact. In India, for example, Reuters reported that the chairman of realty firm Omaxe said the company had an exposure of 450 million rupees, or $9.6 million, through a joint venture with Dubai World’s property developer unit Nakheel, and was looking to exit the project.

And the South Korean builder C&T Samsung said it had stopped work on a $350 million bridge in the city after a unit of Dubai World halted payments, according to Bloomberg News.

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.

“Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far,” Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday. “I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors, especially oil-rich Abu Dhabi — or so investors had assumed.

Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.

Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”

Mr. Wolter of RBS said he too believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.

http://www.nytimes.com/2009/11/28/business/28markets.html?ref=global