Dubai, home to the world’s tallest tower and the biggest man-made islands, is in a financial crisis. The dream city, where lakhs of expat Indians make a living, is trying to salvage Dubai World, the emirate’s flagship in the industrial world, which is struggling to pay back a $ 59 billion loan (around Rs 275,000 crore).
What is Dubai World? Why is it important for the Gulf region?
“The Sun Never Sets on Dubai World”, is its tagline. The investment portfolio of Dubai World, owned by the Dubai Emirate and one of the largest holding companies in the world, extends across 100 different cities in the world. It is spread across a wide spectrum of strategic industries and sectors ranging from ports management, property development, hospitality and tourism, free zone operations, private equity investment, retail to sectors as diverse as aviation, commodities exchange and financial services. Dubai World owns and invests in companies that are the driving force behind iconic property projects such as ‘The Palm’, ‘The World’ and DP World which is the 3rd largest marine terminal operator in the world.
How did it get into a debt trap?
The company ia a classic example of huge borrowing beyond its means. In short, the company borrowed a huge amount from banks to finance its various projects during the 2005-08 boom period but failed to come up with a repayment plan. The global crisis of 2008 triggered the crisis and it never recovered from the blow. Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before the financial markets were hit by the global crisis. Dubai World accounts for $59 billion of these liabilities and it doesn’t have money to repay this debt. Dubai suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 per cent from their 2008 peak.
Where does the company stand now?
According to Dubai’s Department of Finance, the company will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due December 14 from its property unit Nakheel PJSC. Abu Dhabi is also trying to salvage the company by arranging funds. However, rating agencies Moody’s Investors Service and Standard & Poor’s cut the ratings on several state companies, and said they may consider the plan a default. The company had total assets of $99.6 billion at the end of 2008 and total revenue of $14.2 billion.
Why are financial markets and banks worried?
Lenders, mainly European banks, around the globe have lent around $40 billion to Dubai World. Any default by Dubai World will put these banks, which are yet to recover fully from the recent global crisis, in a tight spot. This will also affect other companies in the region and credit rating will take a blow. Stock markets are worried over bank defaults and the big blow to Dubai’s reputation as an international finance centre. Indian investors are also worried about decline in remittances and loss of jobs.
Will India be affected by the Dubai crisis?
Indian banks and companies don’t have a big exposure to the company. If Dubai World sinks, it could put its arm DP World, the container operator in major ports in India, into trouble. Moreover, any damage to the company could affect other firms in the region and many Indian expats who work in Dubai — Indians constitute nearly 40 per cent of its population — may find it tough to retain their jobs. This means remittances to India could decline. But the situation is not that bad and if a bailout is worked out, the company will survive.
Exposure of Indian Banks
Indian banks have informed the Reserve Bank of India that their loan books in Dubai are insignificant compared to their total turnover. The reports are part of the information that RBI has called for from the banks to evaluate their exposure to Dubai World, the city state’s investment company which has asked for a “standstill” on debt repayment till May 2010.
The combined exposure of SBI, BOB, and ICICI Bank as per their estimates on Friday stood at less than Rs 7,000 crore. “Our exposure to the UAE is less than Rs 1,500-crore, which is below 0.3 per cent of the total loan-book of the bank”, said an official of State Bank of India. The loans to Dubai-based clients is largely in the form of short-term loans, which will be repaid in 3-6 months time, he said.
ICICI Bank, also said the bank did not have any significant exposure to Dubai corporates. “ICICI has no material, non-India linked exposure to Dubai corporates,” its spokesperson said.
Out of the Bank of Baroda’s global loan-book of Rs 1,50,000 crore, that for the UAE region is Rs 10,000 crore. Dubai accounted for half of that at Rs 4,000 crore, said CMD MD Mallya. “The bank has only a 7-8 per cent of the total loan-book exposure to the Gulf region. These accounts are well maintained and are unlikely to cause any kind of impact on the balance-sheet,” he said. Bank of Baroda’s total exposure to real estate projects in UAE is even less at Rs 600 crore. Mallya said all the projects are well diversified ones and are performing well.
S Rajendran, general manager and head, international banking, Union Bank of India, said the bank’s office in Abu Dhabi was only meant for liaison and NRI clients services. “We have got a small exposure of $ 5 million at our Hong Kong branch. But this branch is meant for Indian JVs only,” added Rajendran.
Meanwhile, other PSBs, Oriental Bank of Commerce and Bank of India, too said they have no exposure to the Dubai market. Other major private sector lenders, Axis Bank and Kotak, also said their exposure to the Gulf region was minimal.