What Dubai Means for Emerging Markets
Analysts say the emirate’s debt crisis likely won’t impact the reputation of true emerging markets, whose credit ratings are mostly improving
Emerging market assets attracted risk-takers and were early to rally even during the darkest days of the financial crisis and the recession earlier this year. Now, with news that Dubai has requested a standstill on $3.5 billion in debt that comes due in December and may default on $60 billion in debt, investors may be taking a harder look at emerging market assets.
The big fear is how much potential there is for contagion to other markets or assets if the emirate’s investment arm, Dubai World, defaults on its debt. We have learned the hard way in the current financial crisis that risks around real estate aren’t necessarily limited to that particular asset class.
Nick Chaime, head of emerging markets research at RBC Capital Markets, sees Dubai’s extravagant overbuilding spree as endemic of the credit boom earlier in the decade and its possible default as another ripple effect from the global credit crunch. “Dubai is just another victim of the return to stricter credit standards,” he says.
Compounding Selling Pressure
As the end of 2009 approaches, investors will probably insist on getting paid a larger premium to invest in higher-risk assets such as emerging market debt, he says. “A lot of [investment managers] booked big profits and will be looking to pare down their risk going into yearend in order to lock in profits, as they get ready to
The events in Dubai will simply provide added incentive for that and will likely compound the selling pressure on debt and equity assets in emerging markets, he adds. But he expects the impact of Dubai to last weeks rather than months.
Since Dubai’s bonds were regarded as quasi-sovereign, the government’s statement that they aren’t guaranteed could alert some investors to reevaluate how strong a foundation similar bonds they may own actually have, says Arigit Dutta, a mutual fund analyst at Morningstar (MORN).
Wither Abu Dhabi?
Since Dubai was never considered an emerging market, just as Saudi Arabia isn’t thought of as an emerging market, the crisis shouldn’t smudge the reputation of emerging markets in the minds of investors, says John Chambers, deputy head of the sovereign ratings group at Standard & Poor’s. “Dubai is a high-income emirate, so it doesn’t really fit [the emerging market] category at all,” he says. “It had a property boom and the property boom went bust. I’d compare it to Houston [Texas] in 1982.”
Though it may not hurt emerging markets, the Dubai crisis certainly won’t boost confidence in the United Arab Emirates, says Chambers. There had been some thought that the richer Abu Dhabi would come to Dubai’s aid, but that now looks less likely, he adds.
source: businessweek
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