Fisher Investments Editorial Staff

Much Dubai About Nothing

By, 11/30/2009

Story Highlights:

  •  US stocks dropped Friday as investors reacted to news Dubai World—a holding company run by the Dubai government— is attempting to restructure its debt
  • Dubai World's debt problems are tiny compared to those financial firms have already overcome during the financial crisis
  •  Events in Dubai are worth monitoring, but aren't likely to be a catalyst for a renewed global downturn.


The Friday after Thanksgiving is typically a humdrum day for US investors. Not only does the stock market close three hours early at 1:00pm EST, but most investors are usually more concerned about their leftovers than their stocks. But this Friday, they awoke to more than just regret over eating too many pieces of pumpkin pie. While we in the US were feasting on turkey, global markets were digesting the news that Dubai World—the Dubai government's flagship state-run holding company—asked creditors to defer debt payments for several months. The news caused foreign markets to slide while US markets were closed on Thursday. Friday, the US played catch-up, with the S&P 500 dropping 1.7% on the day. Wary investors have been on the lookout for issues capable of stalling the stock market recovery. Events in Dubai are worth monitoring but, fortunately, aren't likely to be a catalyst for a renewed global downturn.

Dubai is one of seven emirates comprising the United Arab Emirates (UAE). The UAE is oil rich, but oil resources aren't shared evenly among the emirates. For instance, Dubai's sister emirate Abu Dhabi has substantial oil and gas reserves whereas Dubai has little. Instead, Dubai's economy has been driven by industries like development, tourism, and finance—areas hard hit by tough economic times.

Dubai became a symbol of global economic prosperity to some and of excess to others. It's now home to the world's largest skyscraper, only seven-star hotel, an indoor ski slope (in the desert), four man-made islands including three shaped like palm trees, and countless other high-flying and high-profile projects—many run by Dubai World's subsidiaries. These aren't the types of showy projects driving growth worldwide. Dubai may have become a symbol of prosperity, but it's certainly not a barometer of the world's economic health.

Scaled globally, the size of Dubai World's debt problem is relatively small. At the end of 2008, Dubai World's total debt was estimated at around $60 billion versus assets of $100 billion. In total, the UAE's GDP is forecast to total only about $230 billion in 2009—a tiny 0.4% of the global economy. And Dubai accounts for only a portion of that. Nor are the UAE's stock markets particularly large—about $118 billion in aggregate compared to nearly $50 trillion globally.

Ultimately, Dubai World will likely successfully restructure its debt or turn to the Dubai government or that of oil-rich Abu Dhabi for financial assistance. But even if Dubai World does default, the impact should be contained and manageable even for those most affected. A handful of UK, European, and Asian banks appear to have the most exposure, but potential losses are far smaller than those suffered during the financial crisis just months ago. In addition, Dubai World's assets provide a substantial buffer to losses.

Most markets in the Middle East will reopen Monday having been closed since Wednesday for an Islamic holiday. Expect them to drop initially, possibly resulting in heightened volatility in stocks outside the region as investors assess the situation. But Dubai's debt problems will likely join unemployment, US consumer health, real estate woes, and many other fears stocks overcome as the bull market continues.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.