Dubai debacle

The  tremor that originated in Dubai, an emerging and upstart financial centre, last weekend created ripples around the world, with markets suddenly making a knee-jerk reaction of fear and caution. The fear arose from experience of the financial meltdown of last year but it seems to be more sentiment-related than substantial. The announcement of the Gulf country’s government-owned company Dubai World that it wanted to defer payment of its $ 59 billion debt till May 2010 raised visions of the failure of Lehman Brothers last year, but there are major differences between the two scenarios. Dubai World has major presence in real estate, leisure  and port development and the companies around the world which had exposure to these areas in the Gulf may feel some heat. There are some Indian companies also in the list but their exposure is not substantial. So neither Indian banks nor real estate companies,  whose operations in the Gulf region are not big, have many reasons to worry. The Reserve bank of India and the finance ministry have also made this clear and known.

The tremor is also unlikely to develop into a global crisis. But the Dubai government’s announcement on Monday that it would not take responsibility for Dubai World’s debts, will not go well with the investors. Financially stronger Abu Dhabi has promised to come to Dubai’s rescue, but in the absence of specifics, the markets will continue to wobble. The situation came to head now as the culmination of the downturn in the real estate sector, where prices have been steadily going down for months as a part and result of the global crisis. The realty prices in Dubai have declined by as much as 40-50 per cent and may get hit further.

With a large Indian population working in the Gulf countries, any disruption in economic activity there will affect the jobs of many Indians and remittances from there. But the remittances from abroad had become diversified in the recent past and there is no possibility of a sudden closing of the tap. The Dubai World is paying the price for going too fast and too soon on its growth plans  with less than necessary attention for the risks involved. That is again another lesson but fortunately without too much pain.