Dubai jitters: Will bears overtake investor confidence now?

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An over-leveraged Dubai may be writing a new chapter in the book of the global financial crisis of 2008-09. On Wednesday, the Dubai government said it will ask creditors of two of its flagship firms, Dubai World and real estate developer Nakheel, for a standstill on debt worth billions of dollars as a first step towards restructuring.

Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, has USD 60 billion liabilities and will seek a six-month "standstill" on its debts with all lenders.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations and most analysts were of the view that Nakheel's commitments would be met," said Shakeel Sarwar, head of asset management at SICO Investment Bank.

John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group, called Dubai's announcement on Wednesday "a huge confidence destroyer...Unless there are clear signals, Nakheel and DW could be in far deeper trouble than before".

Dubai's economy has been hit hard as the global credit crunch saw an end to a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.

Stock markets panic

Reacting to the development, financial markets across the world got into panic mode, not surprisingly and markets in Asian and Europe markets fell on Thursday.

On Friday, US markets remained shut due to Thanksgiving as also some Asian markets but those that were open, including India's, reacted negatively to the news. In India, the National Stock Exchange's 50-share Nifty fell 100 points at opening trade following up on another 100-point fall on Thursday to retreat below the 5,000 mark.

"The Dubai meltdown jitters may continue to have a negative impact on our markets because of the extended weekend both in West Asia and in US," Jagdish Malkani of Taib India said. "Bears may use this opportunity to trade the market down and banking stocks may take a beating."

India on its own is doing well, said Vibhav Kapoor of IL&FS. "But the trend largely is going to be decided by what happens globally. So if the global markets get into a tailspin because of this, obviously India is also going to suffer to some extent though I don't think that will happen."

Kapoor said the global markets needed an excuse for a correction because of the significant run-up seen before and "would use the Dubai episode to provide that excuse".

"You could be having probably a little longer duration correction than we have had in the last few months," Kapoor said. "But it should not change the overall picture because there is still a lot of liquidity which is going to be there, interest rates are going to be low, so all that fundamental picture is still going to continue in spite of this."

Kapoor added that Nifty may be in a 4,700-5,200 till the financial year-end. "If the market goes below 4,500, it will become pretty attractive for long-term investors who believe buying will always come in around these levels."

- With inputs from agencies