The government of the Emirate of Dubai, one of the seven emirates that makes up the United Arab Emirates, stunned global financial markets with the news that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months. The news sent stock markets tumbling across Asia and Europe with indices shedding about 3% on average. The worst performer was Hong Kong’s Hang Seng index which fell by 5.3%. Markets were closed across the Persian Gulf for Eid holiday, and in the US for Thanksgiving.
With a motto of The Sun Never Sets on Dubai World, the holding company is Dubai’s flag bearer in global investments. The fund operates in a highly diversified spectrum of industrial segments – Transport & Logistics, Drydocks & Maritime, Urban Development and Investment & Financial Services – and has played a major role in the emirate’s rapid economic growth. Its stated primary aim is to play the role of a growth engine that powers development both locally and internationally. Its overextension is now playing a role in the financial collapse of high-flying Dubai which unlike Abu Dhabi is relatively oil poor.
Dubai World is seeking a six-month moratorium on interest payments. During that time, it could negotiate with creditors a restructuring that would pare liabilities, which include $20 billion of loans and bonds coming due in the next 18 months, according to estimates. If the lenders don’t agree, Dubai World will default on the notes. The holding company has some $59 billion in total liabilities and accounts for 80 percent of the total debt held by Dubai.
The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC both based in the UAE. Among the international banks that have large exposure are the U.K.’s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC, Germany’s Deutsche Bank and ING Groep NV of the Netherlands.