Dubai debts worry Asia

By Terry Lacey

(December 03, Jakarta, Sri Lanka Guardian) Asian bourses, banks and currencies were worried last weekend as investors dumped shares from Mumbai to Tokyo to distance themselves from over-exposure to debts in Dubai, a leading financial and investment player in the United Arab Emirates (UAE). (The Jakarta Post 28.11.09).

Dubai recently had to ask creditors of state-owned Dubai World and Nakheel PJSC to agree to a standstill on billions of dollars of debt prior to restructuring. The Dubai World conglomerate had US$59 billion of debt as of mid-August, the bulk of the total Dubai debt of $80 billion.

Adrian Rusmana of BNI Securities in Jakarta said the Indonesian bourse, “With the UAE defaulting the perception of global investors on other emerging markets such as ours becomes negative.”

Leading Indonesian economist Fauzi Ichsan of Standard Chartered Bank said, “The world market is now worried about two things : whether there will be other defaults of major financial institutions in other countries, and whether the Dubai World creditors will be able to act quickly to restructure their debts”. (The Jakarta Post 30.11.09).

The MSCI Asia-Pacific Index of local shares took its biggest drop in eight weeks while the greenback rose against major currencies. In Asia local currencies fell from the Philippines to Korea.

Korean companies were believed to be exposed to $32 million of Dubai debt as of September according to the Money Today newspaper.

But the bourse was closed in Indonesia, Singapore and Malaysia due to the Muslim holidays and as of Thursday the Indonesian currency was still the best performer in the region with Indonesian exporters of coal and palm oil worried the rising rupiah could hit export earnings. (The Jakarta Post 26.11.09).

The Jakarta Composite Share Index soared 82 percent this year as overseas investors ploughed funds into Indonesian stocks and bonds, with a positive balance of $951 million on trades.

Fadhill Hasan, executive director of the Indonesian Oil Palm Association was worried the rupiah would hit 9,000 to the dollar soon, “9,000 would be dangerous for our exporters.”

However Tetsuo Yoshuikoshi, senior Singapore economist of Sumitomo Mitsui Banking Corp said the rupiah may weaken on worries next year about the slow speed of global recovery.

And now this Dubai downturn means worries for Christmas instead of the New Year.

The Bank of Indonesia is concerned that Indonesia may be attracting some hot money and senior bank deputy governor Darmin Nasution confirmed recently that the central bank was studying the option to limit foreign fund inflows into short-term (one month) bills, so that when the jitters come the rush out does not become bigger than the rush in. And Dubai is making Asia jittery.

Mitul Kotecha of the investment banking unit of France´s Credit Agricole in Hong Kong took a balanced view. “ We see Asian currencies a bit vulnerable in this environment. Its not going to be a huge fallout because Asia looks more solid in terms of fundamentals.” (The Jakarta Post . 28.11.09)

But another aspect worries Asian bankers. Nakheel PJSC cannot repay Islamic bonds worth $3.52 billion due for maturity on December 14th. This is the largest single default on an Islamic bond, but now we hear of at least half a dozen sukuk in trouble, the first of them being Aston Martin Lagonda.

Indonesian Islamic banking will remain an infant industry for at least a decade although Islamic bonds (state and private) shows signs of take-off. Indonesia cannot afford that this promising financing route becomes diminished by doubts from Dubai.

The wheel of history seems to have turned a full circle. In the G20 Indonesia leads with China the arguments of the emerging economies for improved banking discipline in the West, having learned from its own 1998-1999 collapse. And now Malaysia, Indonesia, Hong Kong and Singapore will want to assess if the Dubai debt default will damage their Islamic bond markets, expanding again after a period of doubts, and any implications for regulatory frameworks.

If fact, Asia may be deemed in terms of financial data to be a little more dependable at the moment than Dubai. That is a development we did not dream of.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.

-Sri Lanka Guardian