Economic growth in the United Arab Emirates is set to disappoint next year, with Dubai debt woes expected to boost credit costs as investors can no longer count on implicit government support for indebted state companies.
The global credit crunch sent the top Gulf Arab economies -- Saudi Arabia and the UAE -- into downturn this year, but high state spending and a turnaround in oil prices were seen helping the world's top-oil producing region to get back on its feet.
The UAE's prospects have dimmed, however, now that Dubai, which had once enjoyed stellar property-fuelled growth, has asked for a repayment freeze on billions of dollars worth of debt issued by its key state-owned construction firms.
Exports are going to be the most affected by Dubai woes, as the UAE region is now India's largest export destination toppling the United States.
Besides, bullion trading in Dubai is likely to be impacted, which may have ripple effect for India as around USD 29 billion of gold from the country is being traded in Dubai.
However, the silverline to this whole scenario is that the ongoing crisis would only impact the Dubai's economy, and countries such as Abu Dhabi is likely to remain on a firm keel in comparison and this should help mitigate the damage to India's exports to the UAE, the report added.
On November 25, the Dubai government had announced the restructuring of Dubai World, and asked all providers of financing for the company and Nakheel to "stand still" and extend maturities until at least May 30, 2010.
Trip cost to Dubai has fallen by 40% due to economic downturn.
Reason for dubai crisis:
The company ia a classic example of huge borrowing beyond its means. In short, the company borrowed a huge amount from banks to finance its various projects during the 2005-08 boom period but failed to come up with a repayment plan. The global crisis of 2008 triggered the crisis and it never recovered from the blow. Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before the financial markets were hit by the global crisis. Dubai World accounts for $59 billion of these liabilities and it doesn’t have money to repay this debt. Dubai suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 per cent from their 2008 peak.
Indian banks have informed the Reserve Bank of India that their loan books in Dubai are insignificant compared to their total turnover. The reports are part of the information that RBI has called for from the banks to evaluate their exposure to Dubai World, the city state’s investment company which has asked for a “standstill” on debt repayment till May 2010.
The combined exposure of SBI, BOB, and ICICI Bank as per their estimates on Friday stood at less than Rs 7,000 crore. “Our exposure to the UAE is less than Rs 1,500-crore, which is below 0.3 per cent of the total loan-book of the bank”, said an official of State Bank of India. The loans to Dubai-based clients is largely in the form of short-term loans, which will be repaid in 3-6 months time, he said.
The combined exposure of SBI, BOB, and ICICI Bank as per their estimates on Friday stood at less than Rs 7,000 crore. “Our exposure to the UAE is less than Rs 1,500-crore, which is below 0.3 per cent of the total loan-book of the bank”, said an official of State Bank of India. The loans to Dubai-based clients is largely in the form of short-term loans, which will be repaid in 3-6 months time, he said.
ICICI Bank, also said the bank did not have any significant exposure to Dubai corporates. “ICICI has no material, non-India linked exposure to Dubai corporates,” its spokesperson said.
Out of the Bank of Baroda’s global loan-book of Rs 1,50,000 crore, that for the UAE region is Rs 10,000 crore. Dubai accounted for half of that at Rs 4,000 crore, said CMD MD Mallya. “The bank has only a 7-8 per cent of the total loan-book exposure to the Gulf region. These accounts are well maintained and are unlikely to cause any kind of impact on the balance-sheet,” he said. Bank of Baroda’s total exposure to real estate projects in UAE is even less at Rs 600 crore. Mallya said all the projects are well diversified ones and are performing well.
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