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UAE stock markets recover, Dubai remains volatile

© 2009 AFP

Abu Dhabi soothes fears

LUCY BATTERSBY

Stand by me … UAE president Sheikh Khalifa, left, and Dubai’s ruler Sheikh Mohammed. Photo: Reuters

THE initial panic caused by Dubai World’s request for a six-month delay on a $US3.5 billion ($3.82 billion) debt dissipated yesterday, with financial markets returning to normal levels and regional equities markets recovering from Friday’s large losses.

The United Arab Emirates’ central bank yesterday announced that it ‘’stands behind” Dubai and banks would be able to borrow money for half a per cent above the local benchmark interest rate. The action was designed to prevent a regional credit crunch or a run on the local banks.

”What that statement does is very wisely provide stability to the domestic bank sector,” the senior vice-president of Moody’s in Dubai, Philipp Lotter, said.

”It does not change the situation at Dubai World or within the corporate landscape of Dubai.”

The local S&P/ASX 200 closed 2.83 per cent higher yesterday, while the Nikkei index gained 2.9 per cent and the Hang Seng 3.3 per cent.

Businesses across the UAE reopened yesterday after a four-day public holiday, and last night Dubai World’s property investment company, Nakheel, asked the Nasdaq Dubai bourse to suspend trading on its Islamic bonds before further announcements.

It was Nakheel’s request last Thursday for a six-month standstill on a $US3.5 billion bond due on December 14 that sparked panic and led rating agencies Moody’s, Standards & Poor’s and Fitch to slash their ratings for government-backed companies in Dubai.

But while Moody’s downgraded its debt rating for international ports operator DP World to Baa2 from A3, it was still a ”perfectly sound” operation, Mr Lotter said.

”As long as it is not negatively affected by actions taken by [Dubai World], which at the moment is not likely, DP World is one of the jewel assets of the Dubai World group and is a very healthy global business.”

DP World owns and operates ports in all the capital cities in Australia through its subsidiary P&O World. Mr Lotter said there was still no indication of what would happen within the six-month requested reprieve which Dubai World had requested to provide the funds to repay the bond, but last week’s events signified that Abu Dhabi’s tolerance for the excesses of Dubai were over.

”Abu Dhabi has made very clear that it stands behind Dubai … [but] it also made clear that it will not provide a blank cheque for anything out of Dubai and will decide on a case-by-case basis.”

Foreigners head for Abu Dhabi

LUCY OXFORD

DUBAI: If Dubai’s expat community needed any further proof the party is over, then this latest financial crisis is it. The desert city-state is being hit hard as its tourism and property-driven boom grinds to a halt in the face of the worldwide recession.

”The atmosphere of the city has definitely changed,” said Rudy Bier, 30, a property consultant from Britain, who moved to Dubai three years ago. ”We’ve come down to earth a bit.”

Along with many in Dubai, Mr Bier has seen his earnings drop in the past year as commissions have dried up and firms have introduced mandatory pay cuts. The once ubiquitous ”all you can eat and drink” Dubai brunch is now a rare affair.

”When I first moved here everyone had a lot of disposable income and I wouldn’t even look at prices in the supermarket. But that’s definitely changed. People are feeling the pinch. Everyone’s a little more cautious.”

Mr Bier, like most Dubai residents, knows people who have lost their jobs in the past year as the ripples of the global financial crisis have hit the shores of the United Arab Emirates. He hopes Dubai World’s announcement will not mean further pain, just as the economy appears to be picking up. ”I’d like to think we’ve had the worst. But who knows?”

Layoffs have been heavy and in the Emirates, where employment is linked to a person’s ability to stay in the country, many are forced to leave if they cannot find work.

Dubai World cut 12,000 jobs last month, while Deyaar, one of Dubai’s largest developers, laid off 20 per cent of staff.

However, Nina Hoffman, 34, a German expat who works in recruitment, said one benefit of the downturn is that journey times across the city had halved. Rents have also tumbled with an estimated one in four flats now empty and ”to let” signs, a rare sight in the boom years, now commonplace.

”A lot of people here to make a fast buck have gone,” Ms Hoffman said. ”At the first sign of trouble they went home.”

Although Dubai traffic may have eased, Sheikh Zayed Road, the highway that links the city to its wealthy neighbour Abu Dhabi, is crammed each day as Dubai residents commute to work. Cars with Dubai number plates now fill Abu Dhabi’s streets and car parks.

”Many of the people who are still here had to really fight to stay here, to find new jobs outside Dubai, to take jobs on lower salaries,” Ms Hoffman said.

Guardian News & Media

Another crisis looms over the world

Tribulation in the Gulf state threatens to derail global recovery, writes Michael Evans.

Preparations were in full swing for a long weekend of celebrations for the religious festival of Eid al-Adha, when Dubai’s rulers quietly slipped out the news.

The Muslim celebration, commemorating the willingness of Ibrahim to sacrifice his son as an act of obedience to God, lasts a week, and the faithful traditionally sacrifice their finest domestic animals.

As the city-state prepared to shut down for the weekend, Dubai revealed it had asked its banks for a six-month stay on its debt repayments.

US markets may have been closed for Thanksgiving celebrations of their own but investors worldwide were left stunned, immediately fearing a return of the toxic debt crisis and once again sending global markets reeling.

Dubai confirmed months of suspicions that its sovereign fund, Dubai World, the owner of half of Australia’s ports operations, is creaking under as much as $US59 billion ($64 billion) in debt while the Gulf state’s total debt is estimated to be as high as $US80 billion.

The announcement comes just weeks before the property developer Nakheel, the company behind Dubai’s renowned palm-shaped islands and headed by an Australian, Chris O’Donnell, is due to pay about $US3.5 billion in bonds.

Global markets, experiencing a six-month rally from the worst financial crisis since the Great Depression, slumped. European markets were among the hardest hit, falling more than 3 per cent amid fears its banks might be exposed to Dubai’s loans.

Australian shares followed, as local banks came under pressure to declare their exposure.

The question being asked now is whether the opulent reinvention of Dubai has been revealed to be a mirage.

Sheikh Mohammed bin Rashid Al Maktoumo and his family had a clear goal: transform Dubai into a regional tourism and financial hub. Not blessed with oil riches like its neighbour Abu Dhabi, the emirate has been trying to reinvent itself. Its oil reserves are expected to run out within 20 years. The state funded its reinvention by borrowing about $US80 billion in a construction boom to transform the economy.

Its sovereign fund, Dubai World, built a $US100 billion asset portfolio including stakes in the Las Vegas casino company MGM Mirage and the London-based bank Standard Chartered. Billions in foreign investment flowed, including from its oil-rich neighbours, as the state supported infrastructure programs while expatriates flocked for tax-free salaries.

But the global credit crisis has taken the wind out of Dubai’s impressive hotel sails over the past 18 months. Deutsche Bank estimates that Dubai suffered the world’s biggest fall in property prices – they fell by half.

In recent months Dubai tapped markets to raise money amid reassurances about its ability to repay debts.

It even raised $US10 billion from a bond issue that was taken up by Abu Dhabi via its central bank. Now that relationship appears crucial to resolving its debt woes, amid questions over whether Abu Dhabi will make its neighbour sweat.

The situation has left investors and strategists attempting to determine the severity of the situation in a fog of uncertainty over a long weekend. It is feared Dubai faces a default of the likes faced by Argentina in 2001.

Deloitte has been appointed as an adviser to help with a restructure and has asked financiers to maintain a ‘’standstill” until at least the end of May. Onlookers describe the uncertainty as a disaster, coming so soon after the financial crisis.

For starters, the cause of the potential default is not immediately clear – whether oil prices receding from record levels mean Dubai is not receiving enough to cover interest repayments or whether it is suffering from write-downs to plummeting asset values. Or both.

Contributing to fears on global markets has been the fact that neither the total amount nor the exact holders of a potentially toxic $US80 billion of debt were immediately apparent.

Borrowers reportedly include Credit Suisse, HSBC, Barclays, Lloyds Banking Group and Royal Bank of Scotland. Other significant investors in Dubai include Citi, BNP Paribas and Lloyds.

As Australian banks yesterday began detailing their own exposures, strategists immediately identified higher borrowing costs as another likely consequence. In an environment of rising interest rates, banks will again be forced to examine their funding costs.

Potential longer-term structural risks from Dubai’s debt problems have also sparked investor concern. Strategists have identified the emirate as a significant buyer of US Treasuries. But if it emerges that Dubai cannot pay its own debts, the sustainability of such states funding US debt as a driver of the US economy will be questioned.

Strategists fear a fall in demand for US Treasuries could increase America’s cost of borrowing, shaking already fragile US consumer confidence and potentially flowing on to US economic growth, widely seen as the engine of the global economy.

And, while global markets had reckoned with having seen off the worst of the credit crisis, there are now renewed fears that the contagion that had been a feature of corporate balance sheets might now spread to sovereign funds. 

Australian businesses operating in Dubai include Leighton Holdings and Sunland, which until recently featured James Packer as an investor and director. Sunland’s founder and executive director, Soheil Abedian, hit back at suggestions his group would be affected by the recent events in Dubai.

At the group’s annual general meeting in Brisbane yesterday he said Sunland Australia had no recourse from Dubai as it had no equity involved there, because its projects are joint ventures.

”I am really pissed off,” he said. ”I will repeat this in Persian, as no one is understanding my English.

”Sunland Australia has no recourse to what is happening in Dubai. We generate significant management fees but we did not put in one cent into the Palazzo Versace; it is all equity-financed by our joint-venture partner.”

But in the year to June 30 Sunland wrote $209.3 million off its interest in three Dubai projects. Sahba Abedian, its managing director, was also emphatic, saying ”anyone that writes off Dubai is remiss”.

”It is building the biggest airport in the world,” he said.

Analysts played down fears about Leighton Holdings’s exposure to Dubai. In recent months Leighton’s boss, Wal King, has been distancing the company from Dubai, stressing the company earns more in Abu Dhabi and Qatar.

Speculation is mounting Dubai World’s Australia port assets will come up for sale with a potential price of more than $5 billion.

Sheikh Mohammed promises to update markets again early next week; critics say the ruler has a lot of explaining to do.

Some reports from Dubai say developments are being perceived as typical of the way things work in Dubai – ”top down and in a vacuum”.

Investors around the world will be hoping the tiny emirate manages to fill the void and calm jittery nerves that are just getting over the worst of the credit crisis.

with Carolyn Cummins and Agencies

World markets roiled by Dubai debts

European stocks fell the most in seven months and bonds jumped as Dubai’s attempt to reschedule its debt rattled investors seeking higher returns in emerging markets. The US dollar slid to a 14-year low against the yen.

Europe’s Dow Jones Stoxx 600 Index retreated 3.2 per cent in London as a gauge of volatility posted its steepest surge in a year. The Shanghai Composite Index slumped 3.6 per cent, the largest drop since August, and Brazil’s Bovespa Index slipped 2 per cent. US markets are closed today for the Thanksgiving holiday.

Australian markets are pointed lower. The SPI 200 share futures index was recently trading 41 points lower at 4677. At yesterday’s close, the benchmark S&P/ASX200 index ended down 13.6 points, or 0.3 per cent, at 4708.6 points, while the broader All Ordinaries index slipped 13.4 points, or 0.3 per cent, to 4727.6 points.

The Australian dollar also retreated, losing about one US cent overnight. It was recently buying 91.2 US cents, 60.8 euro cents, 55.3 pence and 78.9 yen.

London slides

Britain’s top shares ended at a three-week closing low, pressured by hefty falls in the banking sector as concerns over Dubai’s ability to pay its debts took a toll on confidence.

The FTSE 100 ended 3.2 per cent lower, or down 170.68 points, at 5,194.13 – its lowest close since November 6. Losses on the day represented the biggest percentage drop in eight months. The index is still up 50 per cent since a low in March.

Germany’s DAX index ended at 5614.17 points, down 188.85 or 3.25 per cent, while in Paris, the CAC-40 index closed at 3679.23 points, down 129.93 or 3.41 per cent.

Credit-default swaps tied to debt sold by Dubai rose as much as 131 basis points to 571 according to CMA DataVision.

Dubai debt

Dubai World, the government investment company burdened by $US59 billion of liabilities, roiled markets around the world yesterday by seeking to delay repayment on much of its debt.

The US dollar’s slump prompted Finance Minister Hirohisa Fujii to say Japan’s government is watching currencies “very closely,” while traders said the Swiss central bank sold the franc after it climbed to the highest value against the euro since June.

“Dubai isn’t doing risk appetite any favors at all and the markets remain in a vulnerable state of mind,” said Russell Jones, head of fixed-income and currency research in London at RBC Capital Markets. “We’re still in an environment where we’re vulnerable to financial shocks of any sort and this is one of those.”

Sovereign debt

The Dubai announcement drove up the cost of protecting emerging-market sovereign debt against default. Contracts linked to Saudi Arabia climbed 18 to 108, while Bahrain rose 30.5 to 225, CMA prices show. Debt swaps linked to Abu Dhabi government bonds increased 18.5 to 155, Vietnam rose 39 to 252, Indonesia climbed 27 to 229 and Russia added 13 to 205.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Vietnam’s dong, the world’s worst-performing currency, declined to a record low against the US dollar after the central bank devalued the currency to curb inflation. South Africa’s rand weakened 2.3 per cent versus the US currency as gold declined. The Turkish lira slumped 2.6 per cent against the greenback, and Hungary’s forint lost 1.8 per cent per euro.

Brazil’s real slid 1.6 per cent versus the dollar, while Mexico’s peso slipped 1 per cent.

The MSCI Emerging Markets Index lost 2.1 per cent, while Russia’s Micex Index fell 3.3 per cent as commodities retreated. The Bovespa in Brazil slipped for the first time this week and Mexico’s Bolsa Index retreated 1.8 per cent.

Vale, Gerdau

Vale SA, the world’s biggest iron-ore miner, dropped 2.7 per cent in Sao Paulo, while Petroleo Brasileiro SA, Brazil’s state-controlled oil company, fell 1.8 per cent as metals and oil decreased. Gerdau SA, Latin America’s largest steelmaker, slid 2.1 per cent as Chief Executive Officer Andre Gerdau Johannpeter said it’s too soon to raise prices in the Brazilian market.

Dubai, which borrowed $US80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the global recession. Home prices fell 50 per cent from their 2008 peak, according to Deutsche Bank AG. Banks around the world have written off more than $US1.7 trillion as the credit crisis trashed the value of their assets.

Stocks fell from Shanghai and Tokyo to London and Toronto. The MSCI Asia Pacific Index retreated 0.5 per cent as Chinese banks dropped on concern they need to sell more shares to fund demand for loans. Bank of China, which said this week it’s studying options to replenish funds, declined 2.9 per cent.

China Minsheng

China Minsheng Banking Corp. became the first Chinese lender in four years to fall in its Hong Kong trading debut. The nation’s first privately owned lender slipped 3.1 per cent after raising $HK30.1 billion ($US4.3 billion) this month in the territory’s biggest public share sale since April 2007.

Japan’s Nikkei 225 Stock Average fell to a four-month low as the dollar’s decline against the yen dimmed the earnings outlook for makers of electronics and cars. Canon Inc., the world’s largest maker of cameras, fell 2.1 per cent in Tokyo. The company gets 28 per cent of sales from the Americas. Toyota Motor Corp., the world’s biggest carmaker, slid 1.2 per cent.

The VStoxx Index, which gauges the cost of using options to protect against declines in the Euro Stoxx 50, jumped 28 per cent to 30.35, the biggest surge since Oct. 16, 2008.

European Aeronautic, Defence & Space Co., which is part-owned by Dubai, fell 4.3 per cent in Paris. Porsche SE, which is merging with Volkswagen AG, tumbled 5.1 per cent and VW fell 6.2 per cent in Frankfurt. Qatar owns 10 per cent of the voting rights of Porsche and will hold 17 per cent of the combined carmaker.

Banks fall

Dubai World’s lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation. Credit Suisse fell 5.4 per cent in Zurich, HSBC slid 4.8 per cent, Lloyds sank 5.8 per cent and RBS retreated 7.8 per cent in London, where a trading glitch earlier halted trading in many stocks for more than three hours.

Marfin Investment Group SA, the investment fund backed by Dubai Financial LLC, plummeted 9.7 per cent in Athens. Greece’s ASE Index tumbled 6.2 per cent, extending its decline from its 2009 high last month to more than 20 per cent, the common definition of a bear market.

Canada’s Standard & Poor’s/TSX Composite Index slipped 1.5 per cent. Futures on the Standard & Poor’s 500 Index retreated 2.2 per cent. The US stock market will be open for a half day of trading on Friday.

Gilts, bunds

Bonds rose as investors fled to the relative safety of government debt. The yield on the 10-year U.K. gilt dropped 10 basis points to 3.53 per cent. The 10-year German bund yield declined 9 basis points to 3.17 per cent.

The yield on Brazil’s real-denominated, zero-coupon bonds due in July 2011 climbed nine basis points to a one-month high of 11.25 per cent, according to data compiled by Bloomberg. Yields on Mexico’s benchmark peso-denominated bonds due in 2024 rose four basis points to 8.12 per cent.

The yen climbed as high as 86.30 per dollar, the strongest since July 1995, before trading at 86.60. The US currency strengthened against all but the yen among its 16 most-traded counterparts, appreciating 2.6 per cent versus the New Zealand dollar and advancing 2.4 per cent against the South African rand.

The Swiss franc weakened as much as 0.3 per cent per euro, falling from the highest level since June, on speculation the Swiss National Bank sold the currency to curb its gains. The franc dropped 0.9 per cent to 1.0057 against the dollar after yesterday reaching parity for the first time in 19 months. The SNB declined to comment.

Crude oil for January delivery fell 2.2 per cent to $US76.23 a barrel in electronic trading on the New York Mercantile Exchange after a government report yesterday showed rising inventories. Gold for immediate delivery declined 0.6 per cent to $US1,184.20 an ounce in London, after touching an all-time high earlier today.

Bloomberg News