Around the Street
Experts Weigh In on Dubai Debt Crisis
Win Thin, Brown Brothers Harriman
We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism, and services, and are particularly unique to Dubai and should not have wider implications for sovereign emerging markets (EM) risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai. Developments in Dubai should thus be seen in the context of the entire country basically being geared towards real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction.
What is making things so difficult for Dubai World is not just that the domestic real estate market has collapsed. Rather, it's the fact that there is no safe haven for the company. Its operations are worldwide (which should imply some sort of geographical diversification) but they are concentrated in property and real estate development. Every country is undergoing a painful recession and/or deep correction in the property market, so Dubai World is simply getting squeezed in all of its investments. The fact that it is a quasi-sovereign muddies up the water a bit, but we stress again that Dubai's woes should not reflect badly on most other EM credits, which we believe remain sound and on an improving path.
We have stressed time and again that conditions are moving away from investors simply piling into all risk assets in liquidity-driven trades and towards investors becoming much more selective in fundamentally-driven trades. This will require more homework on the part of global investors, but we believe profitable opportunities in EM investing still exist.
Daniel Tenengauzer, Benoit Anne, BofA Merrill Lynch Global Research
Short-term contagion risks were going to be inevitable, given the size and the surprise factor that characterized the Dubai World call for a debt standstill. What happens next is the real question, however. In a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout of from UAE authorities or a market-friendly debt restructuring. In this instance, the short-term contagion would pave the way for a rebound in emerging markets, with attractive levels to re-establish bullish views that would have emerged.
At the other end of the spectrum, one cannot rule out--as a tail risk--a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s. We think this would clearly be a very serious outcome--which again remains only a tail risk at this stage--but the implications would be indeed quite severe in our view. These would include a sudden stop of capital flows into EM, more fragility for foreign banks exposed to the Middle East, possible contagion into global developed markets, and eventually a major step back in the path to recovery out of the global financial crisis.
Vassili Serebriakov, Wells Fargo
News that Dubai's flagship government-owned holding company was looking to delay debt payments has shaken financial markets, sending global equity indices sharply lower. The Japanese yen is the main beneficiary, surging to a 14-year high against the dollar. In turn, the greenback is up against virtually every other currency, and in particular against commodity and emerging market currencies.
Staff economists, Action Economics
Credit-default swap (CDS) spreads knee jerked wider, not surprisingly, on Nov. 27 in the wake of the Dubai World news, as the rising threat of default on their bonds increased protection costs around the world. The Markit CDX North American investment grade index jumped 7 basis points to 109, the highest in two months.
But, emerging market spreads were over two times wider as collateral damage to that region is more worrisome. CDS contracts on Qatar debt widened 15 basis points to 129 basis points, while the cost to protect Abu Dhabi debt jumped 24 basis points to 184 basis points. Malaysian CDS widened 13 basis points to 117. The Emirates Bank credit default swap rate is out nearly 300 basis points wider at 289 basis points.
Dubai Holding Co.'s CDS climbed 290 basis points to 1,155 basis points. DP World, the largest port operator in the Mideast, surged 201 basis points to 810 basis points (a 12% upfront fee is also required).