Dubai debt crisis to have little impact on Pakistan

[Lahore_Real_Estate]

By Saad Khan

KARACHI: While re-emergence of debt crisis has sent shock waves around the world, the extended Eid holidays proved to be the blessing in disguise for the local financial markets. Though no listed company or government has direct exposure to two Dubai entities, which are deferring debt repayment, but there are some implications on the local economy.

The crux of the story is that Dubai, which is the second largest of the total seven states constituting United Arab Emirates, borrowed through its companies around $80 billion to fund a mega plan to transform itself into a financial and economic hub over the last 4 years. The front-liner for the government of Dubai is the state-owned company Dubai World, which stands with around $60 billion in debt now, which is not guaranteed by the government. Major banks exposed to Dubai are HSBC and RBS with over $16 billion and $2.0 billion, respectively while UK is the most exposed country with overall $50 billion in exposure to Dubai.

To pursue its plans, Dubai issued a number of Islamic bonds through state-owned companies i.e. Limitless World and Nakheel World, which are Dubai World’s property units, having a total of $26 billion in debt. The implicit announcement that the entity would run out of cash when the repayment of $3.5 billion on bonds of Nakheel become due in December 2009, sent world markets in chaos. However, the recovery was equally strong as market rebounded amid government’s restructuring of debt of $6 billion with a maturity extending up to May 2010. The reaction from the world was due as Dubai is the region’s financial and trading hub. Also, the fear that it would add to banks losses further to an already $1.7 trillion. Last year, the peaking of world financial crises led by a sharp decline in property prices also made a hard dent on Dubai World’s investments as property prices are down 45 to 50 percent YoY as of last quarter. The only and conventional rescue for Dubai is expected through UAE’s central bank with a fund of $20 billion.

Implications for Pakistan: Unlike other countries, the local economy is well shielded with the recent Dubai debt fiasco as no local financial institution has exposure in Dubai firms. However, in the last few years UAE has turned out to be one of the largest investor in Pakistan with a share of 5 to 10 percent in total FDI received during last 2 years. Economic slowdown as a result of default-like situation may hurt inflows of FDI from UAE.

“Flow of workers remittances in consequence of massive job cuts in UAE can be affected, as UAE’s share in money coming through remittances in Pakistan was 22 percent last year,” Khurram Schehzad, analyst at InvestCap believed.

In order to balance its external gap and to tap the excess liquidity, Pakistan was planning to launch a sovereign bond after success by the Sri Lankan government. However, with rising risk aversion the spreads of bonds over benchmark has increased after the emergence of Dubai debt issue. The price of Pakistan dollar bonds has come down by 2-3 percent after the Dubai debacle as investors preferred to transfer funds from frontier and emerging economies to safe havens.

The Dubai based companies and groups operating in Pakistan and listed in the stock market will not be affected by the crisis.

“However for UBL there are some indirect implications because 27 percent of UBL’s earnings (before tax) are from UAE and any sharp slowdown will affect the quality of assets of UBL,” Farhan Mahmood, analyst at Topline securities said.

“All in all, we expect some negative impact on local bourses due to rising risk aversion.” Foreigners with 24 percent share in free float may trim down some of their holding after the Dubai debacle ahead of year-end, he predicted.

“This is not a major event as in July Standard and Poor’s downgraded ratings of the companies involved in the crisis,” said Sayem Ali, country economist at the Standard Chartered Bank. However, the surprise is that the Dubai government is reluctant to bail out these companies.

“This step of Dubai government is a prudent one as companies will remain cautious in spending and make long-term sustainable investment plans,” Ali said.

Commenting on the crisis’s implications for Pakistan, he said, “This crisis will not have any major negative impacts for FDI and remittances inflow in Pakistan.”

Regarding the exports of Pakistan to Dubai, Farhan believed that Pakistan’s exports are less sensitive to the downturn in the UAE with only 7 percent share (5.5 percent to Dubai).

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