Dubai disaster

Tough day on the sharemarket today, with investors sending the market down by almost 3% in an ugly morning. The big reason? The unexpected problems emerging in the tiny Gulf nation of Dubai.

In the last few years, Dubai has worked hard to transform itself from a desert-bound oil nation into a diverse and rapidly growing financial centre. Expats from all around the world flocked to get a slice of the boom, which came complete with tax-free salaries.

Remember those amazing stories you used to hear about the place? Back in 2006, a quarter or the world’s cranes were in Dubai as the nation’s property market exploded. Remember that housing development in the ocean that looked like a palm tree? Or that project that was in the shape of the world? Or how about those plans for the world’s biggest waterfront development?

Many of these developments are now in serious trouble, and so is Dubai itself.

Yesterday, the Dubai Government announced that it was delaying billions of dollars in debt repayments as it seeks to restructure the state-owned company, Dubai World.

“Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010,” the Government said in a statement.

Or to translate – things are so stuffed it’s going to take at least six months to sort out.

It’s rapidly becoming clear that Dubai’s supposedly glittering economy, which relied almost entirely on real estate development and foreign investment, was built on a foundation of debt.

Dubai World, whose operations include the DP World ports business that controls about 30% of Australia’s ports sector, is carrying a stunning $US59 billion in debt, which is a massive chunk of the entire nation’s debt of $US80 billion.

In response to the bad news Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.

That’s made investors nervous about the possibility that Dubai could actually go broke. That would obviously send shockwaves through global financial markets, so it’s little wonder that Australian investors are in a mood to sell today.

Apart from the link to Australia’s ports sector, Australian companies such as Sunland and Leighton Holdings have operations in Dubai and could well see their shares under pressure in the next few days.

So could Dubai actually go down? It’s certainly possible. In the past, Abu Dhabi, Dubai’s oil-rich neighbouring emirate, has regularly given Dubai loans to keep things ticking over. There’s a strong feeling Abu Dhabi might come to the rescue again, but there are no guarantees.

It should be pointed out that Dubai’s $80 billion debt isn’t massive by global standards. But the collapse of an entire nation would again raise questions as to whether the GFC really is over.