Economic Highlights

New Delhi, 4 December 2009

Dubai World Crisis

CASTS SHADOW OVER INDIA

By Shivaji Sarkar

 Real estate alone cannot build an economy. Dubai World’s $ 59 billion debt restructuring – default in reality – proves it once again. Dubai would hit India in more ways than one. Possibly the crisis is much deeper and may in the final tally go beyond $ 120 billion.

Tragically, the world has not learnt from recent instances. The South East Asian economies collapsed in late nineties, due to ill-advised investments in the real estate, according to the World Bank reports. The US economic crisis also aggravated with its fad for real estate.

The real estate should be a natural corollary to the economic development process. It means that as the economic conditions improve people would invest in properties for better living conditions. But if it happens otherwise – real estate is hyped as the engine of growth – there is bound to be crisis. Most of the prices are speculative and developments are also not real.

This apart, the artificially boosted up prices drain the finance sector, which in turn levies high interest penalties. It further jacks up the prices leading to non-transaction of assets. The ball starts rolling back setting off a chain of crises.

Dubai World – the Dubai government-owned conglomerate - has just done that. Its artificial Palm Island and related projects created hype. Why should people buy artificial continents that Dubai World was building? How many people can live away from their home continent? Dubai rules allow people having work permits to stay in that country. So dream projects were fine with speculative investors but real buyers were skeptical.

It was evident that Dubai’s real estate market was not long-term sustainable, since it was not driven by end-user demand. For a long time now, a multitude of apartments there have been standing unsold, held largely by speculator/investors who had bought them to sell them at higher prices that never happened. The big question now is how many of these investors have the ability to service their mortgages.

It also calls for a transparent policy for the real estate sector. The accounting procedures of the real estate companies, including the procedures for setting the prices, need to be transparent. The sector abhors a regulator. The government has obliged them. It is time for the change to usher in.

Real estate companies have been busy declaring the extent of their exposure to the Gulf markets in general and to the Dubai World in particular. And that is not even half the story! In the past few years, significant investments have poured into the Indian real estate market and construction sectors from investment vehicles based in the Persian Gulf.  These are not necessarily investments into the real estate firms themselves, but mostly take the form of specific joint ventures for executing specific projects.

This would mean that the investments are in projects currently in execution or just announced. Now, add the fact that the investments tend to come in tranches based on progress of individual projects and we have to consider the possibility of these projects going off schedule as promised funds do not come in.
A large number of real estate players have been preparing for either an IPO (Initial Public Offering) or for PIPE (Private Investment in Public Equity) or QIP (Qualified Institutional Placement) investments. Now, if the stock markets take a long term hit, all these plans would have to be revised if not delayed.

Despite the assurance of Finance Minister Pranab Mukherjee that the Dubai crisis would not impact India, the reality is in many ways it has affected many sectors of the economy. The worst is likely to be the movie making business. The market generates 40-45 per cent of the overseas collections for Bollywood films.  It has thrown about 12,000 Indians out of Dubai World projects. Many others had lost jobs during the course of the past two years. Many workers who had come home holidaying, have found their jobs terminated.

Dubai debt problems have cast a shadow over the film industry. Dubai premiere of Bollywood film Paa, starring Amitabh Bachchan and Abhishek Bachchan, has already been put on hold, though the film’s producer, Reliance Big Pictures, attributes this to logistical constraints. Several other Bollywood releases that are lined up, include De Dana Dan, Radio, Rocket Singh, and Three Idiots. Any major movie starring Shah Rukh Khan, Aamir Khan, Amitabh Bachchan or Akshay Kumar typically generates gross collections of Rs 35-40 crore in the overseas market.

The Indian banking sector too has limited exposure. They are yet not known to have invested in Dubai World or similar other ventures. But it would incorrect to assume that they are totally insulated. Yes, they are far safer than the UK banks, which are expected to have financed almost $ 49 billion of the $ 87 billion investments in various projects, including the Dubai World.

Remittances from the region are very likely to come down. The last couple of years have been hard on the workers in the Gulf region, given the general economic situation. Any region specific monetary crisis will end up as the straw that broke the camel's back. Fear is that it is likely to hit the economies of Kerala, Andhra Pradesh and Bihar.

Additionally, it is likely to hit investments by the Dubai Ports World, subsidiary of Dubai World, in seven Indian ports. Worse, it may also affect region specific food item exports demanded by expatriates. A sagging Dubai economy may also generate a fratricidal war within the United Arab Emirates. This may further aggravate the situation and the crisis may not remain confined to the Dubai World. If that happens it may usher in a change in regional trade and diplomatic pattern. Dubai has sought time till May 2010. It is likely that the entire gamut of the crisis would take time to unfold. India definitely needs to prepare a contingency plan.  ---INFA

(Copyright, India News & Feature Alliance)