Dubai’s real estate imbroglio sent shock waves across global stock markets on Friday and Bombay Stock Exchange benchmark 30-share index, Sensex, was down by 1.32 per cent and U.S. stock index futures were sharply lower, a day after markets were closed for the U.S. Thanksgiving holiday.

A possible debt default by Dubai’s state-owned development and investment agency Dubai World and its real estate arm, Nakheel, sparked fears of renewed global financial turmoil, which again reminded the global markets that all are not rosy and the financial recovery is tardy. However, the Dubai Government on Friday said that it expected the fall-out from its massive debt trap and was fully equipped to face the challenges. “The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react,” Dubai Government’s Fiscal Committee Chairman Shaikh Ahmad Bin Saeed Al Maktoum said in a statement.

Asian markets

World markets reacted sharply with Hong Kong’s Hang Seng lost a huge 1075.01 points or 4.8 per cent at 21134.50, Japan’s Nikkei lost 301.72 points at 9081.52 and Shanghai stocks fell by 2.4 per cent.

The Sensex lost 222.92 points at 16632.01. BSE mid-cap lost 86.27 points or 1.35 per cent, small-cap 161.12 points or 2.14 per cent and BSE-100 lost 115.09 points or 1.30 per cent. Almost all sectoral indices ended in the red. IT shares were the worst hit with a drop of 2.20 per cent while the realty sector was down by 0.55 per cent.

The domestic markets opened on a weak note on the back of negative cues from the Middle East, Asia and the U.S. markets. But in the second part of the day, markets witnessed good support from the domestic institutional investors and made a recovery from the low to regain most of the lost points, said Alex Mathews, Head, Research Centre, Geojit BNP Paribas Financial Services. Other global markets also witnessed recovery supported by the improvement seen in Asian as well as European markets.

Financial crisis

Estimates show that Dubai World had $59 billion in liabilities as of August this year. Around 40 per cent of the UAE population is Indians and this may have a negative impact on India’s inward remittance, said Mr. Mathews. However, the Union Finance Ministry is of the opinion that the financial crisis in Dubai would not impact remittances from Indian expatriates in the Gulf region. “Remittances from expats didn’t suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely,” said Ashok Chawla, Finance Secretary, in New Delhi.

It is further reported that Indian companies may not have that much exposure compared to other global financial institutions. U.S.-listed shares of banking services group HSBC Holding fell 7.3 per cent to $57.52 in pre-market trading. However, banks in India reportedly stated that their exposure to Gulf countries either nil nor insignificant. BSE’s banking index, bankex, lost 1.41 per cent. Bank of Baroda declined by 4.6 per cent to Rs. 521.40, which is expected to have the largest exposure to Gulf countries among Indian banks.

“The Sun Never Sets on Dubai World” is the corporate caption of Dubai World; unfortunately the sun seems to have finally set on Dubai World’s financial affairs. The proposal by the Dubai World to restructure its debt portfolio has taken the markets by surprise and is being viewed as a prospective quasi-sovereign default,” said Krishnan Ramachandran, CEO, Barjeel Geojit, a sister concern of Geojit BNP Paribas Financial Services, based in Dubai.

The timing of the announcement added to the uncertainty, it was done just before the long Eid holidays. Both S&P and Moody’s have downgraded a number of Dubai entities and some of them to near junk status. It appears that debt restricting will go through, at least partially with the GCC-based banks, “but one has to wait and watch as to how international banks will respond to this offer.”

The domestic markets are expected to react negatively once they open on Monday and the global markets have already reflected their concerns with corrections seen, especially in the CDS and bond prices of Dubai-based entities, Nakheel in particular, Mr. Ramachandran added.

Rupee drops 20 paise

The rupee weakened by 20 paise against the dollar and closed at 46.64/65 on Friday after hitting the 47-level due to month-end demand for the U.S. currency and weak equity markets. Dealers said the domestic currency came under pressure due to fears of capital outlow by foreign funds as equity markets tumbled after the Dubai debt crisis.

Asian stocks slumped as the Dubai-debt shock waves hit the region, shaking banking shares and pushing Japanese yen to a fresh 14-year high against struggling dollar as investors unwound risky trades

Oil refiners bought dollars for their monthly import payments which affected the rupee-dollar value. The rupee resumed lower at 46.85/87 and dropped further to 47.07 before closing at 46.64/65.

The Reserve Bank of India, however, fixed the reference rate for the dollar at Rs. 46.81 and for the euro at Rs. 69.83.

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