Dubai Crisis : This is why investors are nervous. It’s not the lack of money
Posted by 7starsdubai on December 1, 2009
original source Wall Street Journal
In fact, it raises questions about other investment destinations: China, for example.
One reason why markets continue to be jittery over last week’s news of a standstill on property conglomerate Dubai World’s debt is the lack of transparency surrounding it. That’s a direct function of a closed political system that is not conducive to foreign investment.
The announcement of the restructuring has been handled abysmally. Even with Dubai World divulging long-awaited details Monday, information has been spotty and contradictory.
It’s still not clear which creditors will be hit, and there are still big questions over how much of a guarantee oil-rich sister emirate Abu Dhabi is willing to give to back up Dubai’s debt.
Investors have been left to speculate over political motives.
One theory holds that Abu Dhabi ruler Sheik Khalifa bin Zayed Al Nahyan is withholding his support–despite the financial risks of not doing so–because he’s angered by his Dubai counterpart’s close ties to Iran.
Alternatively, others say that the naturally more conservative Abu Dhabi is simply reluctant to stoke moral hazard by bailing out Dubai’s risky property investments.
Either way, because they can’t divine what’s going on in either of these two billionaire monarchs’ heads is the essence of investors’ problems. In an information vacuum, many have imagined the worst and have felt compelled to sell their Dubai debt positions, which in turn creates problems for banks with exposures there and, by extension, for global stock and credit markets.
This all stems from the overarching political system in place.
In the absence of democratic institutions, the UAE’s sheikhs are not required to explain themselves.
And as the majority owners of many of the biggest companies, they face no checks and balances from minority shareholders. Meanwhile, contract law is fraught with the uncertainty of a legal system that’s low on judicial independence.
This is why investors are nervous. It’s not the lack of money.
After all, Abu Dhabi, with a sovereign wealth fund worth anywhere from $300 billion to $900 billion, has plenty of that.
The bigger lesson in all this is that investors need to be doubly careful of investing in countries with closed political systems.
With the spectacular failure of U.S. financial markets last year, it has become fashionable to laud the top-down central planning of countries like China, which was able to more quickly put its giant fiscal stimulus to work this year.
But if and when China faces a crisis, investors will have a more difficult time interpreting the actions of government officials and of the managers of its state-run corporations than they would in more openly governed countries.
To be sure, the Chinese Communist Party functions with more consensus than monarchy like Dubai. And for now, China’s capital controls make it nearly impossible for foreigners to make portfolio investments there.
Nonetheless, direct foreign investment in China is soaring, as is broader exposure to its boom via assets in neighboring countries. If nothing else, Dubai’s crisis is a reminder that those investments carry political risks that are absent from more transparent markets.
—Michael Casey writes a regular column on fixed income markets for Dow Jones Newswires. Previously he was Newswires’ Buenos Aires bureau chief and before that, assistant managing editor for the U.S. economy, Treasurys and foreign-exchange group in New York.
Write to Michael Casey at firstname.lastname@example.org
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