The Dubai World Crisis & Standard Chartered BankIntroductionOn November 26, 2009, the major investment conglomerate Dubai World shocked the financial world by requesting a “debt standstill” until May 2010 on $26 billion worth of its $59 billion debt, pushing the Emirate of Dubai to the brink of a sovereign financial crisis and exposing the counter-party risk of banks and investors worldwide (Khan, 2009). One of the largest lenders exposed to the growing crisis was the Standard Chartered banking group, which does a significant proportion of its business in the Middle East and was heavily invested in Dubai.
In this essay, the chain of events leading up to the crisis and its eventual resolution – though one which, as it turns out, is not quite completed – will be discussed, with particular focus on the implications of the crisis to the global financial system and lenders such as Standard Chartered. Some possible alternative solutions that might have been used will be suggested, and compared with the actual steps taken by the government of Dubai and other key players in the financial drama. Causes of the CrisisThe conditions that led to the Dubai World debt crisis were laid in the ‘boom period’ of 2004 to mid-2008 in Dubai, which was driven by rising oil prices and an average annual GDP growth rate of 6%.
During that period, Dubai sought a “high-speed” growth strategy and diversified its economy away from a trade-based system to one reliant on Services and Tourism, which caused a rapid and initially very profitable expansion in the Real Estate and Property sector (Khan, 2009). There were a number of conditions that collided to cause the debt crisis.
First, because the Emirate of Dubai does not have significant oil and gas reserves of its own (unlike neighbouring Abu Dhabi), the government borrowed heavily to finance economic expansion, and increased its ‘monetary pumping’ into the Dubai economy by forty times between October 2006 and December 2007 (Shostak, 2009). Property values in Dubai increased as long as oil prices kept rising, and the rapid development in the emirate attracted many global investors who had excess liquidity produced by booming financial markets in other parts of the world.
Plus, there was also a belief that the credit of Dubai World – which is a government-owned corporation, but not actually a part of the Dubai government – was backed by the government, even though the government and Dubai World explicitly told investors that was not the case (“Could Dubai World's Debt Default Spark a Crisis in the Middle East and Beyond? ”, 2009). When the collapse of US real estate prices beginning in late 2007 destroyed the value of the world’s huge derivatives market, three things happened: Oil prices declined, investors began pulling their money back from Dubai to make up for losses elsewhere, and the credit market dried up.
All of these things caused property values in Dubai to plummet, and without the cash flow from investors in real estate or the continued availability of credit, Dubai World and its property arm Nakheel suddenly found themselves unable to pay their debts (Khan, 2009).