Saturday, November 28, 2009
Dubai Crisis: What it means for India?
The markets tanked on Thursday and Friday. The markets lost about 6.46% to hit a low of 4806 before recovering to close at 4942. The Dubai World inability to pay the loan raising the possibility of sovereign default.
Dubai World is a wholly owned subsidiary which has interests in businesses across the world. It has a stake in Dubai Ports. Its real estate arm is called Nakheel which is developing Dubai.
Contrary to public perception, only 6% of Dubai's revenue comes from oil and natural gas. Most comes from Trade (16%) and real Estate (22%). The Dubai World is asking for interest holiday on their loans. The loans total to almost 64 billion dollars.
Dubai was being developed on the US model of taking huge debt and developing another Las Vegas.
So what does this present crisis imply?
First of all, the speed with which it is resolved will decide the course of the global markets. Most likely the cash rich Abu Dabhi Emirate may step in. A lot of UK Banks have exposure to this debt. This crisis will send alarm bell rings across the globe. A flight to safety and risk aversion may mean the dollar index strengthening.
In March 09, the dollar index hit a high of 89 when the emerging markets hit a bottom.A 17 % dip in dollar index has led to emerging markets doubling.
The FIIs sold 1050 crores on Friday and they have been selling the whole week.
If there is a flight to safety, the dollar index will strengthen and the dollar carry trade will unwind.
The dollar strengthening means commodities becoming cheaper. Gold prices eased on Friday hitting 1155$ dollar to a ounce at one point of time.
This could be a good point to add gold at lower rates. The Dubai crisis how it pans out will decide the future course of the markets.
Also, the India diaspora working in the Middle east will be hit if employment opportunities go down. A large Forex boost for India is the inward remittances from Indians employed there.
The government has a lot to think about.