News that the Middle Eastern emirate, Dubai, had called for a standstill in its debt-servicing payments last week rocked financial markets. It raised uncertainty about the immediate effect on the region, and reminded investors that the financial crisis was not over and that the banking system remained fragile.
It also created confusion about what happened, who might be responsible and how far the risk might spread.
The entity that called for a debt standstill was Dubai World, a state-owned conglomerate that invests in property and other assets. Investors and creditors may have assumed that it would be backed by the government in the event of a possible default. Yet the government seems to be washing its hands of the problem. This week Dubai finance department head Abdulrahman Al Saleh said on Dubai Television that, as Dubai World had several activities and was exposed to different sorts of risks, it was decided from the beginning that it would not be guaranteed by the government.
Mike Upton - Concerns overcooked
This seems surprising, considering that Dubai World has used its links to government and the emirate's ruling family to support hugely ambitious investments in Dubai and elsewhere. Unlike other states in the region, Dubai does not have much oil. For more than a decade it has used its assets, including its connections, to create a regional centre for property development, tourism, finance, trading and other activities.
One of its companies, Nakheel, is working on property and related "iconic projects" costing US$60bn. Most are in Dubai and include hotels, residential developments and golf estates. Some are built on large man-made islands shaped as palms. Others are in tall buildings.
Nakheel has also invested internationally, including in SA. It led the consortium that acquired control of Cape Town's V&A Waterfront for $1bn in 2006. It has interests in several other unlisted SA assets such as game lodges, and it backed the new One&Only hotel, operated by Kerzner International, which owns the One&Only brand.
Dubai World's vision of creating a non oil economy, and its projects, may have remained successful had it not been for the credit crunch and recession. But funding for the projects relied greatly on debt. In the downturn its cash flows are strained, funding is expensive and it is struggling to refinance borrowings as bonds come up for renewal.
Last week the company asked for six months' grace on a $3,5bn loan, part of estimated debt of $22bn, which is about a quarter of Dubai's sovereign debt.
This cannot so far be compared with a sovereign debt default. Dubai may be bailed out by its much wealthier - and oil-rich - neighbour, Abu Dhabi. Direct exposure of international banks and other investors seems relatively limited, though the credibility of the emirate and its projects will be knocked.
SA construction companies such as Murray & Roberts and Group Five have little or no exposure.
Murray & Roberts says its only contract to which it was exposed with Nakheel was at Trump Tower, and this was terminated and all accounts have been settled in full. It's involved, with joint venture partners, in work on the Dubai International Airport and adds that it's "confident of its rights".
Group Five has no exposure to Dubai World, says CE Mike Upton, who adds the concerns about a Dubai default seem "overcooked".
The United Arab Emirates central bank said this week it would back Dubai banks. Nonetheless, a possible default in the Middle East - or continuing uncertainty about the outcome - could help cause a significant correction in markets, which have risen strongly since March. Last week's volatility showed the underlying nervousness.
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