Turkish risk exposure in Dubai debt crisis

Dear Energy Professional, Dear Colleagues,

On November 27th 2009, we received news from BBC and CNN that Dubai, a small city state, faced a massive debt problem. At present, they are unable to pay this debt for the next six months and news that might have seemed inconsequential suddenly became huge when it was disclosed that the debt, which was initially $40 billion, jumped to $60 billion and is today estimated at $80 billion.

Dubai is a small gulf city state with no petroleum resources. They serve the other neighboring Gulf States with no limitations whatsoever. They have financial institutions, luxury hotels with all the amenities and facilities one could imagine, including alcohol, gambling and prostitution. They have new real estate construction projects in various Palm shapes on Gulf shores. However, despite all of these lavishes, they could not circulate the debt repayment properly. Their debt accumulated, and in the end, S&P declared that Dubai is commercially listed in a state of bankruptcy as of last Friday.

It is our sincere feeling that this was an inevitable consequence of a deregulated financial system on remote Gulf shores. Without a regulated market, it may happen elsewhere in the future. Along with Dubai, debt insurance, or so-called credit-default swaps, also jumped sharply amongst Gulf States such as Bahrain and Qatar. Insurance against debt defaults rose for Turkey, Russia, Greece and Ireland as well.

The Dubai state company has prestigious real estate purchases in Istanbul through IETT privatization and there is a project called Dubai Towers there too.

The financial institutions that finance this huge spending are in difficult positions. These commercial banks are named in British newspapers as HSBC, ING, Barclays, Royal Bank of Scotland, Deutsche, Citi, and countless others.

We are happy to learn that Turkish banks have no such risk exposure at this time. We are told that our financial institutions have no appetite, no capability, no permission, no funds, nor any courage to enter such volatile markets. However, on the other hand, we have at least 100+ Turkish contractors of all sizes working in the area. These are major contractors or subcontractors of big construction projects, man-made islands, airports, hotels, and infrastructure facilities. These are big names in our construction business: MNG, Gama, Baytur, Yüksel, Nurol, Güriş, and STFA are all in Dubai.

We are told that the debt crisis was very well known by our colleagues in the region since these Turkish companies/ contractors were unable to receive their monthly payments for more than one year. We were unable to have such information and it was kept secret in order to not spread panic to their suppliers. Now, this has all been made public and those companies will not receive any money for the next 6 months at minimum.

There will be a great multiplier effect; these companies could not pay their employees and now their employees will not be able to send money to their families. They will not be able to pay their living expenses at home either. It is a snowball getting bigger and bigger everyday.

This is your writer's humble evaluation of the ongoing events in the Gulf. We need to have a clearer explanation of the latest status, clear definitions of Credit Default Swaps (CDS), and debt repayments in order to know whether we are now in the second phase of the global crisis.



I expect those constructors to return home and work on local projects, such as the new thermal power plant investments, thermal power plant rehabilitation tenders. There will be less hot money injection from Gulf States which make our local financial markets too volatile.

During hard times of economic crisis, stay in cash, stay liquid, get restructured, continue in employee training, continue advertisement, and get more prudent in spending. I wonder if this is a commercial/ financial nightmare.

Your comments are always welcome. Thank you and best regards.

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Haluk Direskeneli, Ankara based Energy Analyst