Wait And Watch

Wait And Watch
The Times of India, November 30, 2009, Page 12

Don’t push panic buttons on the Dubai crisis

Dubai’s government-run investment firm, Dubai World, sought a “standstill” agreement last week to defer repayment on much of its $59 billion debt. This rocked global stock markets. The move now has national governments everywhere worried about the impact of the corporate debt default request. Is there cause for knee-jerk panic? Experts the world over seem to think not. They say Dubai is only the latest demonstration of the perils of overleveraged ambitions. The unravelling of what’s dubbed “the Dubai model” of breakneck speed development was waiting to happen. Indian authorities, on their part, recommend a calm assessment of Dubai’s possible fallout. This is wise.

Banks are checking their exposure levels, and so is industry. Our real estate firms are largely domestically driven, but even those with projects in Dubai don’t seem ruffled so far as their India operations go. So far, it appears that Dubai World’s debt woes could have a marginal fallout. While the conglomerate’s future plans in India may falter, existing projects may remain unscathed. Nonetheless, concern for around five million Indians living and working in the Gulf is understandable. They remit over $10 billion annually. Around 40 per cent of the UAE’s population is Indian, contributing over 10 per cent of incoming remittances. Yet if incomes of the families of immigrants and contracted workers dip, it’s worth recalling that money flow has been thinning for some time. Also, NRI deposits are more likely to be hit than remittances. Again, job contraction may occur, but migrant labourers have been coming home over the past year since most are employed in construction, a sector badly hit by the global recession.

The focus is also on investor confidence, and its possible domino effect in the form of capital outflows from emerging markets. Where India’s concerned, some amount of capital flight may actually facilitate a correction in Dalal Street, in light of a recent surge in FII inflows that raised eyebrows. But the prospect of big outflows looks unlikely. Dubai-based sovereign funds are not big buyers of Indian equities and other financial assets. Nor is there much Dubai-linked private stakeholding in listed Indian companies. So the bourses aren’t likely to be too rattled.

Finally, it’s improbable that Dubai World will be allowed to tank by Abu Dhabi, with all its oil money. With many of the developed world’s biggest banks surviving on government handouts, a bailout for a Middle Eastern government-owned investment fund would be unexceptionable. Minus the firm promise of a quick bailout, however, the markets could bet on a sovereign default. Today, sovereign debt’s piled up everywhere. One sovereign default may make bond holders and markets start doubting the repayment abilities of their debtors. That’s something global finance doesn’t need.