Financial markets from Shanghai to New York shaken by Dubai World

The man-made island Palm Jumeirah is one of the artificial islands of the Palm Islands group in Dubai, being constructed by Nakheel Properties, a subsidiary of Dubai World. The other islands in the Palm Islands are the Palm Jebel Ali and the Palm Deira. The photo shows as Palm Jumeirah as seen from the International Space Station, photographed by Expedition 10 Commander Leroy Chiao from the International Space Station in 2005. It is advertised as "being visible from the Moon," and this man-made palm-shaped structure displays 16 huge fronds framed by a 12-kilometer protective barrier. On completion the resort will sport 2000 villas, 40 luxury hotels, many shopping centers, cinemas, other facilities and it is expected to have a population of approximately 500,000 people.

The debts of government-owned Dubai World has triggered of shockwaves across the world’s financial and share markets. Dubai is one of the emirates (states) of The United Arab Emirates (UAE), the others being Abu Dhabi, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah. Dubai's main income is from tourism, real estate and financial services, although it was originally built on oil industry, which now contributes only about 6% of the economy.

Dubai World is a Dubai government-owned investment company with main subsidiaries such as Atlantis - The Palm, Dubai Drydocks, Dubai Multi Commodities Centre, Dubai Ports World (the third largest port operator in the world), Inchcape Shipping Services, Island Global Yachting, Istithmar, Jafza, Kerzner, Leisurecorp, Limitless, Maritime City, Nakheel (residential estate development projects), One & Only, Tamweel and Tejari. Dubai World has more than 50,000 employees in over 100 cities around the world, and has huge real estate investments in USA, UK, South Africa and many other countries.

Due to global recession Dubai's real estate market took a downturn after a six-year boom. On 25 November the Dubai government announced that Dubai World intends to ask its creditors to extend repayment of debts until 30 May 2010. Months earlier Dubai World’s accounted debt was US$ 59 billion, which is about 75% of Dubai government's US$ 80 billion debt. Soon after the announcement, Asian equity markets crashed 3 to 5 percent. It was followed by knee-jerk reactions of financial institutions and investors in Europe, USA, Canada and many other parts of the world, including Japan.

Most financial analysts expect the Arab Monetary Fund, based in Abu Dhabi, the capital of the United Arab Emirates, to avert a financial crisis, as Dubai’s economy has shaken financial markets from Shanghai to New York. As Dubai brought back memories of the mortgage meltdown that led to the worst recession since World War II, some investors in US were busy buying US Treasury bills, pushing the US dollar up and bringing down the stock market and the price of gold and oil.

Upheaval in trading calmed down when European banks and governments around the world said that their exposure to Dubai World's debt is not a cause of worry. Credit Suisse, UBS AG, Barclays, ING Groep INV and Deutsche Bank said their exposure to Dubai World's debt is not going to have any significant impact on them, followed by similar announcements by the governments of Brazil, India, Philippines and Taiwan.

US banks’ exposure to Dubai World is only US$ 9.9 billion while it is US$ 49.5 billion for UK banks. Japan's top banks have hundreds of millions of dollars sunk in Dubai World, and Japan's largest banks Mitsubishi UFJ Financial and Sumitomo Mitsui are among the consortium of 11 creditors that lent to Dubai World. The remaining lenders are mostly European banks and Middle East banks lending about US$ 16.5 billion.

Most analysts feel the current market reaction is an overreaction because Dubai World’s short-term debt could be only about US$ 20 billion and medium-term debts about US$ 80 billion, whereas UAE’s Abu Dhabi Investment Authority alone manages over half a trillion US dollars. Abu Dhabi is one of the wealthiest states in the world and analysts feel it can easily bail out Dubai, both being prominent emirates of the UAE.