When Dubai announced it was seeking standstill agreements for Dubai World's debt, the world took a collective gasp -- markets fell and many speculated that it could be the tipping point for a round of emerging market sovereign defaults. That fear is easing.
Dubai World confirmed Tuesday that only $26 billion -- not $59 billion as originally thought -- of its debt will be subject to the standstill agreement. It does not include the debt of DP World and Jebel Ali Free Zone, two of the company's entities that have well-established, viable revenue streams.
In addition, Dubai's ruler, Mohammed bin Rashid Al Maktoum, stated unequivocally on Tuesday that the government will not provide support for Dubai World or its entities, backpedalling from the regular support he previously expressed for the emirate's corporate entities.
Financial institutions in the United Arab Emirates (UAE) and Europe are the most impacted. Local banks hold 15% to 20% of Dubai World's debt, according to Moody's, while HSBC reported $16.3 billion in total loans to the UAE. Standard Chartered Bank disclosed $7 billion in total loans, but said only $400 million was in commercial real estate. The Royal Bank of Scotland (RBS), which reportedly arranged $2.3 billion in loans to Dubai World, has not issued a statement.
A source close to RBS said the fact that the bank has not said anything is representative of Dubai World's impact on the bank.
Asia appears to be the region with the least exposure to Dubai. "There is often a contagion effect among emerging markets," said Elena Okorotchenko, sovereign analyst at Standard & Poor's. "But the trouble in Dubai should not be immediately translated to emerging Asia. Investors and creditors realise Asia has come out of the [global financial] crisis in good shape."
According to Macquarie, the financial institution in the region with the largest exposure is Singapore's DBS, which has a S$558 million ($404 million) loan affected by the standstill -- approximately 10% of the bank's adjusted total equity for 2008. Japan's three mega-banks -- Bank of Tokyo Mitsubishi UFJ, Mizuho and Sumitomo Mitsui Banking Corporation -- have approximately $325 million of combined exposure to Dubai.
Asian markets, the first to react to Dubai's announcement, have also recovered from their initial declines. Hong Kong's Hang Seng Index closed up 0.8% at 22,289.57 points yesterday after slumping to 21,134.5 points on Friday.
Debt markets also appear little impacted by Dubai World. "The message from debt markets is that this is an event isolated to Dubai, and the risk of contagion is very low," wrote Macquarie analyst Michael Kurtz.
Standard & Poor's and Moody's have kept their Asia-Pacific sovereign ratings stable since Dubai's announcement last Wednesday and credit default spreads barely moved, increasing by a miniscule 20 basis points for Indonesia and the Philippines.
Where the impact of Dubai World will be felt the most is in the emirate itself and around the Gulf. "The short-term impact of recent events could be quite severe for the city-state," said Tristan Cooper, head analyst for Middle East sovereigns at Moody's Middle East. "As Dubai's resilience has already been weakened by the effects of the global economic crisis, it is likely that the tentative economic recovery seen over the past six months will be reversed by recent events."
Cooper suggested that if the current incident impacts Dubai's ability to raise capital for public investment, the emirate's infrastructure advantages over neighbouring Abu Dhabi and Qatar could close, giving these natural resources-rich jurisdictions a competitive edge in the region.
The Dubai Financial Market Index was down 5.6% yesterday, closing at 1,831.48 points. The Index has fallen more than 7% since trading resumed on Monday after the Eid holiday.
The impact of the debt payment standstill on remittance flows from Dubai's overseas workers is unclear. South Asian countries and the Philippines all have a large number of residents working in the Middle East.
"It could have an impact on remittance flows to India and some other countries in Asia and that's why we are monitoring such flows closely," said Standard & Poor's Okorotchenko.
HSBC estimated that if 1.5 million of the 2 million Indians living and working in the UAE are affected, it would translate into a loss of $9 billion in remittance flows to the country, or 0.7% of total economic activity. In short, the impact would be quite small.
Much remains to be sorted out concerning Dubai World. Abu Dhabi and the UAE central bank have said little beyond their statement Sunday that they would provide "selective" support to Dubai and its corporate entities, though most analysts believe Dubai would not have made such a dramatic move without the consent of Abu Dhabi. Additionally, Dubai World creditors have begun working with the company to renegotiate its debt payments.
What does seem clear is that Dubai and its associated entities will struggle for some time to come.