Shock to financial world

Dubai’s state-run investment firm Dubai World announced that it required six-month delay in debt servicing and repayment. The amount of debt in question is US$59 billion.

 

The banks, property developers and ancillary corporations world over connected with Dubai World’s various mega-project developments and with exposure to the debts are now reviewing their potential risks.

 

Without a transparent disclosure of the extent of the damages to individual financial institutions and corporations, one cannot help but panic into action such as selling out shares in these publicly-listed companies. Share markets from Hong Kong, South Korea, Japan, Taiwan, Australia, China and India saw huge declines in their stock indices on Friday’s trading.

 

Singapore’s stock market was closed for Hari Raya Haji. We will know the impact on Monday. I could imagine MAS, Singapore Exchange and various listed companies are working over the weekend to assess their exposure to this fallout.

 

Such is the fragility of the global financial systems with the inter-connected web of exposure to one country’s debt problem. Sovereign debt default can occur, remember Iceland during the height of financial crisis in late 2007.

 

Investors with exposure to Middle East stock markets should know. Since the start of the financial crisis of 2007/2008, the value of investments has been beaten down to less than 60 per cent. This loss seems permanent and any hope of recovery to cost level is miniscule with this latest shock announcement by Dubai.

 

The other festering problem worsened recently: US dollar weakness among world currencies. For the first time Japan Finance Minister sought cooperation from the US and European countries to stop further decline in the US dollar. The seriousness of US dollar weakness is now being acknowledged by Japan. China is well aware of this issue. China in the past had asked US to halt the decline of its currency since China holds the most US dollars in its foreign reserves.

 

If the above two problems were not tackled appropriately, they will impact the tentative economic growth of nations since the third quarter this year.

 

Written on 11/28/2009 10:53 AM

 

Copyright © 2009, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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