The ongoing collapse in the Dubai economy is another stark reminder to investors around the world that the aftermath of the credit crunch will be with us for many months to come. There are many investors around the world who were under the impression that “the worst was over” and 2010 onwards would see a return to the boom times we saw just two years ago. However, there is now growing concern that the ongoing difficulties in the Dubai property market, and Dubai economy as a whole, will impact upon worldwide confidence which could seep into the worldwide investment markets. Are we on the verge of credit crunch part two?
The Dubai property market
The Dubai property market was seen by many as a win-win situation with massive demand and massive state funding used to attract significant investors from overseas. While Dubai is one of the United Arab Emirates, situated at the heart of the oil industry, many people will not be aware that Dubai does not have massive oil reserves and indeed oil will not be the major income provider for the economy in the future.
Once the authorities realised that the future of Dubai lay away from the oil markets they very quickly decided to inject significant capital into the property sector which would attract overseas investors which would then attract overseas companies to the region. This part of the overall plan to improve the profile and attractions of Dubai worked perfectly!
The main property developer in Dubai, Nakheel, is effectively an offshoot of a state-controlled and state financed operation. As a consequence, investors and money market analysts had assumed there was little or no chance of this particular operation defaulting on, or looking to delay, debt payments. Unfortunately, two days ago we saw the first signs of major cracks in the Dubai economy with news that Nakheel was in fact looking to suspend debt repayments in the short term and this move was backed by the state-controlled parent company.
It is believed that the amalgamated debt for the various state-owned and state-controlled operations has now topped $60 billion (although some people believe it is nearer $80 billion) and the fact that state is in reality struggling to repay its massive debt is of enormous concern.
Confusion in the marketplace
Despite the fact that the debt repayment suspension application has been made the Dubai authorities have not come forward with a definitive plan for the future and analysts and investors are unsure as to how this issue will be resolved. For those who have experience of investment markets and money market, you will know that confidence is THE major factor in any economy and any investment market and if confidence is dented the knock-on effect can be enormous.
There is already speculation that the Abu Dhabi authorities have put together a rescue package which could be announced within the next few days. However, the very fact that the Dubai authorities, directly or indirectly, have asked for a suspension of debt repayments would seem to indicate that this rumoured rescue package from the Abu Dhabi authorities has yet to be signed off or may indeed be in trouble.
Property in Dubai
When you consider that property prices in Dubai have been under pressure since just after the onset of the credit crunch, falling by 50% in the first six months, the latest blow for the Dubai authorities has seen the market collapse yet further. Ironically, at the onset of the original credit crunch, and worldwide economic downturn, the Dubai markets had held up fairly well in the short term with many investors “bragging” that it was actually insulated from the ongoing worldwide difficulties. Oh, how wrong they were!
Once investors decided to bank their profits in Dubai, the trickle of sales and redemptions soon became a raging river which ran through the heart of the Dubai property market and the Dubai economy. The authorities brought in various financial restraints to try and maintain some kind of control of the Dubai financial markets but unfortunately many of the moves were counter-productive.
What next for Dubai?
The Dubai situation, with nearly $80 billion worth of debt, is a stark reminder for those investors who were looking towards the boom times and blue skies. While it seems almost inevitable that the Dubai authorities will at some point be able to arrange a rescue package, probably from one of the other Emirate States, the ongoing confusion is having an impact upon money markets in Dubai and around the world.
Many property investors have now been holed below the waterline and even when the market does recover, as many believe it inevitably will, there’s likely to be a massive overhang for some time to come.
How has Dubai impacted upon the worldwide investment market?
The impact of the Dubai problems is clear for all to see with the ongoing demise in worldwide stock markets and concerns that we could be on the verge of credit crunch part two. It is not necessarily the fact that many western banks and western businesses have massive exposure to the Dubai economy but the fact that confidence has been shaken around the world.
The ripples which we felt two days ago have now reverberated to each and every corner of the economic globe and it seems almost inevitable there will be an increase in the cost of short-term debt. As a time when the worldwide economy is already struggling and businesses are being starved of liquidity, yet another short-term increase in the cost of debt could sound the death knell for many businesses.
While it would be wrong to say that the Dubai problems, which first emerged two days ago, came as a surprise to everybody in the financial markets, there is no doubt that many had automatically assumed that a state funded operation would never default on its debt. However, while the state has not yet officially defaulted on its debt it seems only a matter of time before this is confirmed, news which is certain to impact upon investor confidence in the short to medium term and could at the very least produce a drag on the worldwide economic recovery.
There are two schools of thought with regards to Dubai, one group of people who believe it is in the early stages of a massive growth period and is only experiencing “teething pains” while another group believe that the ongoing expansion of the Dubai economy was funded purely on debt which has now grown to an uncontrollable $80 billion. Who is right remains to be seen, but the short-term impact of the Dubai situation is being felt around the world!