Dubais Debt Crisis
Proposal of Dubai to delay payment of its debts across many markets of Persian Gulf has led to a debt crisis. The delays led to a rise in the cost of shielding government notes from Saudi Arabia. Property bonds also led to increased period of maturity making it so hard for investors to put trust in the financial systems of Dubai. This procedure has led to development of complication during collection period and it has resulted to accumulation of debts that are not paid thus the market collapse. This is one of the major challenges that have led to debt crisis in Dubai. The stock markets are not left behind in this type of marketing strategy and the value of stocks in the Stock Exchange Market has lost value (Jacob, 2009). The current situation in the whole world about economic crisis has also led to development of stock crisis in Dubai.
Putting down strategies to run business is very critical because this allows business to survive in the entire competitive global market. One of the most important strategies is to ensure that the debts are reduced by controlling borrowing and encouragement of customers to make payments on cash basis. Once the debts cannot be paid fully, they then become bad debts and this is an expense to the company. Dubai deals mostly in importation of motor vehicles and it is well known for a good trading in the stock markets but the accumulation of debts has led to existence of problems that cannot be resolved easily causing allot of challenges to the market and lives of many households.
Macroeconomic view of the Dubai Crisis
The author of this paper tries to discuss the reasons that led to development of debt crisis in Dubai in respect to macroeconomic views. The crisis in Dubai can be expounded well by looking it in the perspective of macroeconomics. Debts in a business are a normal way of carrying on transactions in the market place. However, macroeconomic theory does not advocate for this process. Indeed, there are some macroeconomic theories that support the use of debts as a way of converting them into cash. The macroeconomic aspect of debt crisis in Dubai covers a wide range of explanations as to how this crisis happened and its impact in economy (Schuman, 2009). For instance, in the past weeks, most Americans had focused their view on Turkey but most financial markets in the entire world were faced by debt crisis in Dubai leading to their collapse. The crisis in Dubai started during a short period of holiday but its effects were not as adverse as most how the business people had speculated. There was speculation of a bail out by Abu Dhabi Central Bank which had promised to issue a statement about Dubais financial institutions such as Barclays bank, Standard Chartered and HSBC.
Liquidity of banking system in any particular country is essential for monitoring the flow of money in the economy. As it was speculated, the government failed to guarantee the payment of sixty billion US dollars causing many local markets to tumble. Failure by the government to honor payment of this debt was the beginning of Dubais crisis and the crisis has spread even to the local markets. Dubai officials saw sixty billion US Dollars as very little debt that could not have any impact on the entire market but their sediments were wrong because the collapse of the neighboring markets was as a result of this unpaid debt. This has led to many unanswered questions to many investors from different corners of the world (Cochrane, Harif, 2009). Global investors who had rushed to invest in the markets of Dubai are now counting losses and also the economy has collapsed as a result of this crisis.
Other global markets like in London had almost forty four billion pounds lost as a result of Dubai debt crisis. To show how serious this crisis had on many global markets, the FTSE 100 index lost more than one hundred and seventy points as many investors had moved away from London to other markets in the world. France and Germany were not spared by this crisis particularly in the sector of car industries. The big share holders in these companies started to withdraw their membership because they feared the any effects of stocks collapse in many stock markets owned by individuals along the Gulf region. By this time, the problem had spread in many parts of the Gulf region and other neighboring cities creating a problem of mistrust and collapse of stock markets.
Most markets in Dubai had taken some steps that led to the restructuring of its state owned company that has the highest number of shareholders (Dubai World), but there was a in payment of the company liabilities that amounted to fifty nine billion US dollars. Delays in payment of these debts led to risk of loosing the value of Dubais currency against other currencies in the world. Financial markets were affected by these conditions and equities in the stock exchange markets were also affected. United Kingdom sterling pound for instance was affected adversely because it traded at its weakest point ever in the history of British exchange rates. The value of sterling pound against euro was very weak and many investors could not dare take a chance of investing in Dubais financial markets (Jacob, 2009). Economist and other strategists announced the extent to which most UKs banks had mounted a lot of pressure to financial institutions of Dubai.
There are concerns that the holding company in Dubai, that is, Dubai world is seeking for any bank or any other financial institution that can offer aid to settle down these debts to continue on with normal operations. This announcement has led to many investors move out from getting frustrated as a result of the crisis created by accumulation of debts. According to a certain market provider of information in Dubai, the price that investors are supposed to pay as a way of protecting them incase of such crises has risen because the situation is worsening day by day. There are also speculations that Dubai is taking a step of standstill from operations for a period of not less than six months and there is no investor who can take such chances. It is a problem that is affecting Dubai markets and other neighboring markets. The problem began as a minor one but its current effects are even bigger than it was expected. Analysts argue that if this condition is not contained, many financial markets in the entire world will collapse leading to a major global crisis.
According to business world, Dubais debt crisis has threatened most of the known global financial markets like in New York. The crisis has led to a change in the way banks operate. For instance, some banks have reviewed the terms and conditions of giving its customers loans and this has affected the ability of nations to recover their economy. Financial institutions are mostly affected by this crisis because Dubai is in search of any potential financial institution ready to settle down its debt. Many commodity and stock markets have collapsed in New York, Asia and London as a result of investors fleeing to United States where there are better grounds for investment.
During this period of crisis, US dollar was very strong against other currencies and investors turned to United States for investment. In addition, the banks in United States had no interest. There were some minor effects felt by investors in the US but due to the movement of business men and women from Dubai to United States, financial markets got a lot of boost. The effects of Dubai debt crisis led to banks stopping issuance of loan to their clients. Business was not normal in many banks because they feared that the chances of getting back the loaned amount was very minimal (News Now, 2009). Due to the collapse of banks and other financial institutions, many employees were left jobless and the government could do nothing about it. Although of late many banks are lending customers some money, there is that risk of failing to recover the whole amount and thus banks nowadays are trying to avoid it completely.
The crisis caused the US dollar to be strong against euro and sterling pound but it traded at low rates against Yen which was a good show that financial markets had started to experience some problems. Dollar traded lowly against yen for a period of almost fourteen years when Japan started to buy dollars and sell yen as away of making the dollar recover from the slump experienced by many banks. As per information by Goldman Sachs, many banks in British experienced the highest amount of loss during this period. For instance, Standard Chartered made a loss of one hundred and seventy seven million US dollars and HSBC made a loss of six hundred and eleven million US dollars in form of loan debt (Jacob, 2009).
Since the economy of Dubai had shown signs of improvement, construction of infrastructures and other facilities were at the top gear. Many contractors had seen as a good opportunity to invest in but after a short period of time, the situation turned the other way round. For example, South Korea construction firms have many pending projects in Dubai as a result of this crisis. It is estimated that about three billion US dollars are yet to be paid. Many markets have developed in the neighboring cities of Dubai despite of the crisis but they are yet to be affected by this crisis. In Latin America and Asia, the performance of financial markets is said to be better than that of United States. This problem has however been a challenge to those investors who want to put their capital in Dubai and other countries because the effects are being felt through measurement of countries Gross Domestic Product (Cochrane, Harif, 2009). The crisis is therefore not health for the development of economy and advancement of business strategies in many global regions.
Expected future problems of Dubais debt crisis in surrounding countries and United States
Debt crisis has had many problems to the economy of its neighboring nations and United States. Most countries have taken the advantage of the rapid growth of economy in Dubai and its efficiency in the financial systems but they were caught unaware by the collapse of the financial system. Failure of government to pay for debts that had accumulated due to delayed payment was the beginning of financial markets collapse. New York City, London, Asia, Latin America, United States and other European countries are amongst the most common nations that felt the heat of Dubais debt crisis. Emerging markets in Dubai has also attracted different types of investors who in turn have been affected by this crisis. An investor wants to put his or her capital in a project that will pay back within the shortest time period possible but when the project turns out to take longer time, then it is not a worthwhile for investment (Schuman, 2009). This is what happened in Dubai whereby many individuals and corporations had seen opportunities and rushed to exploit such opportunities only to get negative results at later period of time.
Real estate market is another area that will be affected in future by this crisis. Many individuals or corporations have taken loans in form of mortgages to invest in real estates. Since the loans are issued at low rates, every body is guaranteed of getting some money to build houses for rent. Constructing many houses has led to flooding of market and the houses loose value. The security of the mortgage is basically the houses and since they have no value in the event of financial crises, it becomes so hard for banks to reclaim back their loans. This is an area which many banks did not put into consideration while giving out loans and it has reached a point where the government is the only organ that can save this issue. Alternatively, central bank of Abu Dhabi that owns most of the oil fields in Middle East can pledge to settle down the mortgages.
Dubai debt crisis if not put under control will lead to collapse of the economy. The economy of any particular country is very much important especially when it comes to issues of debt settlement like loans and mortgages. When the debt accumulates from a long period of time, it becomes very difficult to pay it unless there is aid from strong financial systems or the government intervenes. Dubai has been supporting the development process and has enhanced many developing countries to invest highly in various sectors of production. Many people from China, Africa, Europe, Japan and the neighboring areas work in Dubai and the money they get as salary is send back to their native countries to support their families (Jacob, 2009). This has aided in the growth of economy by way of buying goods, services and through payment of taxes. Therefore, the crisis in Dubai in future will affect the rate of economic growth in countries that have their people work in Dubai. The entire world is watching on the situation in Dubai and if it is not corrected after a period of say five years, the growth of economies in other countries will also be affected.
Another major effect of the crisis in Dubai that will be felt in future is about changes in life style of many people around the world. The collapse of stock markets in Dubai and other economies will have a very great impact in the lifestyles of many individuals. A good example is a situation where by individuals are employed in stock market exchange and other financial institutions. When these institutions collapses due to accumulation of debts, then the employees are send home because there is no work and perhaps no money to pay them. This definitely will affect the lives of these people because of lack of money. Those who are lucky enough might get jobs in other firms but the standard of living will have to change (Cochrane, Harif, 2009). The allowances given to these employees will be cut and thus the families of these employees will be affected in future. The rate of crimes is seen to be on the rise and poverty level also increases as a result of debt crisis. Developing countries are the major victims of these problems because once there is a break down in the supply of money, it becomes very difficult to catch up with investment in their own countries that has no enough resources to support the economy.
There are some impacts associated with Dubai debt crisis in United States and other foreign countries. Like in the Qatar, it has been investing about 6 billion capital in many banks of Dubai as a way of promoting economic growth but it is faced with some challenges like securing of fields that are rich in gas. It is a nice way of increasing the confidence level of many neighboring and other foreign countries. There is this issue of providing cheap ready market for goods and services that are found in other global markets (News Now, 2009). The stock market in Dubai is also the best in the surrounding area although foreign currencies tend to bear a very big blow in many markets of the world. US dollar during this time of crisis was very strong against the yen and this led to many investors changing their style of investment in Dubai and shifted to United States of America. This is one area that led to the spread of benefits to the United States. While other countries were feeling the effects of crisis, American on the other hand had fully benefited from this situation.
In discussion therefore, this paper has been about the problems associated with debt crisis in Dubai, impacts of the crisis in neighboring countries and the US. The impacts are too effecting and there is a need to control this crisis for better future in the economic growth in both developing and developed nations. However, we can rationally accuse the weak financial parameters and guidelines over the fueling process of this crisis.