Dubai World announcement serves as wake-up call to world markets

Dubai World's request for a six month standstill on its debt payment hit Western markets by apparent surprise. But looking back, the rallies by global stock markets since March 2009 were not reflective of the real economies performance. Recent events surrounding Dubai World's debt payment serve therefore rather as a wake-up call for investors than a real threat.

From March 2009 until November, US equity markets, for example, went up 60%. But on Tuesday November 24, one day before Dubai World's bid for a delay in its debt payments, the US Commerce department said that the US economy grew 2.8% in Q3, slower than first thought. And businesses cut back their spending on commercial construction at 15.1% annualized pace, much deeper than the 9% annualised cutback first estimated.

Wake up call

Looking ahead, the Dubai World case has reminded the global community that the financial crisis is far from over. According to Fahd Iqbal, Vice President Equity Research at EFG Hermes in Dubai, foreign investor confidence into Dubai is 'deeply affected'. 'But we expect action in the coming weeks by the UAE Central Bank and more detailed information, as due to Eid official statements have been short and rare', he told AMEinfo.com.

First reactions on Western markets might be more emotionally-driven than rational, and opinions stating that Dubai could trigger a second global financial crisis should not be taken too seriously, as Hong Kong-based Dr Marc Faber states. The Swiss investment guru regards the alleged danger of Dubai World's impact on the world economy as 'small' and recent stock market reactions as exaggerated.

'The global volume of bad bank loans is 50 times higher than Dubai's $80bn dollar debt', Faber told Switzerland's Cash TV on Sunday. 'Just to give you an idea how the financial crisis a year ago took shape: six months before September 2008, when Lehman Brothers collapsed, the US investment bank already had a debt of $613bn in its books', Faber adds. This figure eventually grew to $1 trillion.

Emotions and misconceptions

It is interesting to note that it is not only market participants who are over-strained by the news but also the international media. For example, Dubai and Abu Dhabi are still considered as two separate states by many news providers outside the Middle East. 'Will Dubai's neighbour state Abu Dhabi be ready to help?' is an often-heard question.

Another misconception is that the UAE has witnessed only domestic growth since its foundation 38 years ago and that it is only now that the Gulf country has had to deal with a 'crisis'.

The reality is that the country has gone though a number of ups and downs. In 1990 the fall of BCCI sent global shockwaves throughout the financial world, including Abu Dhabi. Regional wars in Iraq (1991, 2003) and Afghanistan (2001) also pushed foreign investors out of the Middle East, at least temporarily. Not to mention the stock market crash in 2006 when the UAE and KSA bourses lost 46% and over 50% respectively, after years of a stock market and IPO mania.

The Dubai World case must also not distract global investors from unsolved issues in East Asia, Europe and the US. According to Dominique Strauss-Kahn, managing director of the International Monetary Fund 'the probability is high that US and European banks bear still 50% of their total losses triggered by the financial crisis in their balance sheets', he told French daily Le Figaro on November 25.

'The financial crisis did not start in Dubai and it will not end with us', Abdulla Al-Awar, CEO of the DIFC authority told AMEinfo.com in August 2009. The global turmoil started with the sub-prime-mortgage-crisis in the US and was spread over the world when investment bank Lehman Brothers declared bankruptcy. The price for excessive-leveraging which was en vogue in the post 9/11-era has still to be paid - by the world economy and not only by Dubai World.