Tough 2012 for Dubai has the making for a perfect storm for Dubai Credit Crisis Part II

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Large re-financing demands alongside weak credit for government linked firms, and falls in revenue from business and tourism signal a tough 2012 for Dubai. Headwinds from the US, Europe and now India will lead to a failure to provide a bounce in the fortunes of Dubai and may lead to a new Dubai credit crisis in 2012. The three previous pillars of Dubai growth of Real Estate, Tourism and Financial Services continue to languish, and coupled with a strong US Dollar will result in Dubai continuing to enjoy dry times in 2012.

Tourism hit by strong dollar and Dubai image problem

Whilst the fixed exchange rate of the UAE Dirham with the US Dollar has provided stability and in particular has allowed neighbour Abu Dhabi to benefit twice over with a strong dollar and high oil prices, the strong dollar has negative effects for Dubai’s tourism sector making it more expensive for tourists to vacate in Dubai. The slowing of growth in the emerging BRIC economies in particular India will likely pile more downward pressure onto the tourism sector.

Whilst once held up as a model of holiday paradise, Dubai has a major image problem. Many European visitors having seen fellow country persons languish and in some cases die in Dubai prisons for alleged minor offences are scared of visiting. No amount of slick holiday advertising can compensate for nasty headlines in local European media, especially whilst the Dubai authorities appear to give little in the way of transparent investigations.

Real Estate remains in doldrums

Prices in many developments have halved, and many small investors have lost large amounts of money with little legal recourse for compensation, indeed many meetings to discuss the possibility of legal action have been banned with local hotels refusing to host such events.

There is no visibility for a return to the previous real estate growth and along with it the loss of massive hard money liquidity.

Deals dry up as Deutsche Bank and Credit Agricole withdraw Employee’s

With Dubai stocks trading near to 2004 lows, Deutsche Bank and Credit Agricole are among international banks withdrawing employees from Dubai as deals dry up, revenue falls and lenders curb costs.

“Dubai never quite fulfilled its promise as a regional banking hub,” Bloomberg quoted Raj Madha , a banking analyst at Rasmala Investment Bank Ltd., a Dubai-based asset manager. “With limited capital market activity, and little sign of a serious improvement in the near future, it’s not surprising that investment banking costs are being transferred elsewhere.”

According to a report on Bloomberg, HSBC, Europe’s biggest bank, said this week it will stop offering brokerage services to retail investors in the United Arab Emirates and focus on institutional clients after local trading volumes and stocks plummeted.

Dubai firms face refinancing pressure: Moody's

A number of state-owned companies face medium-term pressure to refinance, Moody’s Investors Service said in a recent report stating the debt tied to Dubai’s government and its state-owned non-financial companies totals $101.5 billion.

Dubai and its government-backed companies have about $13.8 billion in bank and bond debt coming due before the end of 2012 and Moody’s raised particular concerns about the financial sustainability of Dubai Holding Commercial Operations Group, Jebel Ali Free Zone and DIFC Investments that owe a combined $3.8 billion in 2012.

Moody’s said it sees “few signs” that the Dubai firms with weaker credit profiles are taking steps to cut debt and move to “more sustainable capital structures.” This raises concern that Dubai might need further financial support, the ratings company said.

Fitch sees risk in Dubai’s Banking sector

Separately Fitch Ratings said in a report that the United Arab Emirates’ key banks are facing some strong headwinds. It highlighted Dubai Islamic Bank and Emirates NBD (Emirates National Bank of Dubai) as two Dubai based banks who face challenges with non-performing loans. Raising long-term funds will be challenging, particularly for Dubai banks, “due to the perceived risk relating to government-related entities and the less liquid global markets,” Fitch wrote.

Emirates NBD in particular was highlighted in a report by Goldman Sachs analysts saying that it may need to hold onto between $1.6 billion and $2.2 billion through the end of 2013 just to deal with bad loans.

Updated: 4th Jan 2012.

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