There are two sharply divergent views on the Dubai debt crisis. One, put out largely by western pundits and reflected in the international media, is signified by evocative phrases like ‘boom to bust’, ‘this desert-dream-turned-nightmare,’ and a potential ‘major sovereign default problem.’ The other is the less alarmist view we incline to. Let’s look at the basic facts. The unexpected announcement by the government-owned company Dubai World that it needed until May 2010 to clear its debt of $59 billion, instead of paying it on schedule, threw global financial markets into a tizzy last week. At the root of this panic was the apprehension that this could be the start of a Lehmann-like domino sequence, which would choke the nascent global economic recovery. But the markets overlooked a crucial difference: whereas Lehmann was privately owned, Dubai World is owned by the government. So unless the Government of Dubai goes broke, which can be ruled out, and unless cash-rich Abu Dhabi fails to stand by its sister emirate, which seems most improbable, the creditors’ money is safe. Waiting a little longer for it should not be such a great hardship, especially if interest is paid on the overdue amount. Indeed, had the debt been repaid on schedule, investors would have had to look for potentially riskier investments. In that sense, the jitters were completely unwarranted and typical of financial markets, which tend to respond before thinking things through fully. The real problem for Dubai is that real estate, which accounts for a substantial proportion of the emirate’s GDP, has been in the doldrums for the last 18 months because of the global economic slowdown. But with economic recovery now starting, things should get better. Tourism is likely to make up for the shortfall in income from the dip in real estate and financial services.
What about the impact of this crisis on India? Around 40 per cent of Dubai’s population is made up of Indians, but the country’s financial exposure is quite small. The Indian banks and real estate companies that operate there have not reported major outstanding debt. The State Bank of India has an exposure of about Rs.1,700 crore and the Bank of Baroda has lent Rs.4,000 crore. The private sector banks have larger exposures but not so much as to cause worry. Likewise, India’s large real estate companies are not in any danger of losing their shirts in Dubai. However, what the country does need to worry about is inbound investment from Dubai, especially in ports. Dubai World’s subsidiary, DP World, is an important player in India, and its $500 million investment plan for the country might be affected. The larger lesson for India relates to the risks of opening up its financial markets with reckless speed and without building in regulatory safeguards.