THE DUBAI CRISES

THE recent troubles that Dubai World(Government owned company), has been
having with repayment of its debts is a grim reminder of the fact that the global
financial crisis is possibly not over yet. In fact, the fundamental causes for the
financial distress that Dubai finds itself in are not much different from what caused
the economic meltdown in the US a few years ago: excessive consumption and
highly-leveraged real estate. The contrast between how the US and Dubai,
handled the crises is too stark to ignore. In the US, several privately owned banks
including investment banks having no retail depositors interest to protect have
been bailed out with large doses of taxpayer’s money. In Dubai, international
lenders to government owned entities that were generally assumed to be sovereign
risks, have been left alone to nurse their massive credit-related wounds.

To put it in simple words we can say that the big real estate projects of Dubai
made to attract tourists and foreign investors, projects like the Palm Island and
many others due to the economic slowdown were not able to generate revenues
which were expected of them, as a result the payment of interest and the principal
amount got difficult. This served as a chain reaction as the banks and financial
bodies which had given loans to Dubai had to payback the interest to the investors
who had invested money in these institutes.

The whole issue came into lime light when one of the government-owned entities
(Dubai World) owing around $59 billion to international banks, asked for a
standstill as regards debt servicing from its borrowers for six months in late
November.
In the credit markets, for a government-owned company, whatever is the legal
position, limited liability is just an academic detail and, in reality, these companies
are considered sovereign risks. It is possible to argue that Dubai, should have been
treated as an exception given that it is one of those unusual instances when the
borrowings of the government entities are substantially in excess of the GDP of
the countr, too big to be considered a sovereign risk.

The International banks that have lent some $59 billion to Dubai World are in no
financial position to take even a partial write-down on these assets, having barely
survived the last onslaught on their balance-sheets

Masood Ahmed, Director of IMF's Middle East and Central Asia Department
coated " though there may be a slowing down in Dubai, Abu Dhabi continues to
grow rapidly, as do other countries in the Gulf Cooperation Council (GCC). So the
net effect in terms of remittances out of the region may not be as large,"

If we look at the possible impact of the Dubai crises on India we need to know that
The UAE accounts for nearly 13 per cent of the total remittance flow into India,
with as many as 42 per cent of the 1.5 million population of Dubai being Indians,
So if Dubai suffers a jolt, its repercussions are bound to affect India, Indian
Construction companies like Nagarjuna Constructions, Larsen & Tubro, Omaxe
and BSEL Infra who carry on contract jobs would also be affected, since payments
would get delayed and project sizes will be curtailed, thereby affecting their
bottom-line. Many projects will get delayed or trapped, meaning a decrease in
business. If the crises prevail for longer there are chances that there will be Job
loss and many might have to come back. The UAE was India's top destination for
exports for the year ending March this year, displacing the US. The country's total
exports to the UAE grew by a phenomenal 53 per cent to US$23.92 billion this
financial year from US$15.63 billion in 2008.
Dubai has investments in India too. DP World, part of Dubai World, runs five
container terminals in India, accounting for 40 per cent of India's container traffic.
The company has invested over US$2 billion in India and had said it would spend
US$12 billion more in the next five years