Last Thursday, Dubai World announced that it was seeking to delay loan repayments for 6 months. This shook financial markets all over the world as investors realized that what they once thought was Quasi-sovereign debt would was implicitly guaranteed by the government might still potentially default. Though the total amount owed by Dubai World, which is a state-owned holding company, which was reportedly 59 billion USD, is relatively small, compared to the hundreds of billion that had to be poured by the US government into financial institutions to bail them out from the US financial crisis last year, it was still a sobering reminder just because the worst seems to be over, and things seem to be on a recovery, doesn’t mean something like that can’t happen.
Dubai will take a long time to dig themselves out of the financial mess they have inflicted on themselves. Whether Abu Dhabi, Dubai’s oil rich neighbor cough ups from its oil riches the amount that Dubai needs to bail Dubai World out is a moot point, the massive oversupply in its property sector will take a very long time to recover.
However, from Asia’s perspective, the panic has been rather overdone. The Hong Kong stock market crashed more than 1000 points on Friday. (Singapore was spared because markets were closed due to Hari Raya Haji). From an economic perspective, although large, 59 billion is not an amount that by itself, can bring a recovering global economy back to its knees again. Also, the main impact of this will be felt in the gulf region, as a large proportion of the funding to Dubai World was from banks in the gulf region.
One can be excused for feeling a strange sense of déjà vu to see such an announcement from Dubai happen, slightly one year after Lehman Brother’s collapse triggered the start of a financial crisis in the US that spread to the rest of the world. However, it is important to keep thing in perspective. Dubai does not have anywhere near the kind of size or importance that the US economy or the US financial sector had. Asia, and for that matter the rest of the world, does not rely on the Dubai consumer, nor is it a major export destination market for Asia.
For now, the main worry is that this might have a financial impact on the already fragile balance sheets of banks which might have participated in helping to fund Dubai World’s grand expansion plans. But as I mentioned, the major casualties are going to be banks in the gulf area. While there may be some possible projects or financing done by some of the banks and other institutions here, these are unlikely to be big nor have a material impact on the banks here.
If fear does cause markets to tumble because of this though, then it would be a good opportunity to look for bargains in the market. Investor sentiment has been shaken, but economic fundamentals remain unaffected. It is then a matter of being patient until investor sentiment recovers, and if the global economic recovery continues, then investor sentiment will definitely recover.
To end up, we are also coming to the end of the year soon. Besides looking back at how things are, and looking forward to the new year, it is a good time to rebalance your portfolio. Given the big swings in many markets this year, and the last, rebalancing will be very important.
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