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Dubai and Abu Dhabi markets set to fall on debt woes

Stock markets in Dubai and neighbouring Gulf emirate Abu Dhabi were set to open sharply lower on Monday as investors in the United Arab Emirates finally get their chance to react to Dubai's debt crisis.

business Updated: Nov 30, 2009 08:13 IST

Stock markets in Dubai and neighbouring Gulf emirate Abu Dhabi were set to open sharply lower on Monday as investors in the United Arab Emirates finally get their chance to react to Dubai's debt crisis.

The exchanges have been closed for the four-day Muslim holiday of Eid al-Adha since the once-booming city state announced that its main Dubai World holding company was seeking to suspend payments on its debt.

The trend on the two UAE bourses is expected to reflect the sharp falls in Asia and Europe on Thursday and the United States on Friday, while some analysts predict the Dubai index may plunge by its one-day limit of 10 percent.

"I expect Gulf bourses to dive like the September crash last year," following the Lehman Brothers bankruptcy, predicted Saudi economist Abdulwahab Abu-Dahesh.

However, the UAE central bank on Sunday tried to limit the impact of the crisis by saying it was pumping more liquidity into the banking system.

"This is a step aimed to calm investors... Markets should be calmer (than feared) tomorrow," Emirati financial analyst Nasser bin Gaith said on Sunday.

He said he expected the decision to have no real immediate impact on Dubai's debt problem, pointing out that Dubai World is largely indebted to foreign banks.

"On practical level, there is no direct impact... Local banks have limited exposure to Dubai World, unlike foreign banks," he said.

British banks reportedly have a total exposure of 30 billion dollars to Dubai World.

The central bank said the UAE banking sector stands stronger and more liquid than a year ago, and that it enjoys a "strong base of stable deposits."

Other Gulf stock markets have also been on holiday since Thursday for Eid al-Adha, sparing them an immediate impact from Dubai's announcement.

However, the news sent shock waves throughout other markets around the world on Thursday and Friday as investors feared a possible default by Dubai and its state-owned businesses, which together owe 80 billion dollars.

Dubai and Abu Dhabi will be the only Gulf stock markets to open on Monday. Kuwait follows on Tuesday and Saudi Arabia's financial market, the largest Arab bourse in capitalisation, will remain on holiday until Saturday.

Sheikh Ahmed bin Saeed al-Maktoum, head of Dubai's Supreme Fiscal Committee, said on Thursday: "Further information will be made available early next week."

Dubai does not have big oil reserves, unlike Abu Dhabi which sits on around 95 percent of the UAE's crude deposits and runs the world's largest sovereign wealth fund valued by analysts at 400 to 500 billion dollars.

Two Abu Dhabi-controlled banks subscribed to Dubai bonds worth five billion dollars in a deal announced a few hours before Dubai revealed its debt problems.

The UAE central bank, backed by the coffers of Abu Dhabi, previously scooped up Dubai bonds worth 10 billion dollars in February, earmarked to help solve the debt problems of Dubai entities.

But doubts have been growing about Abu Dhabi's commitment to buoy Dubai, whose growth came to a screeching halt amid the global credit crunch before going into reverse gear.

Property prices in the once-booming desert city have slumped by 50 percent from their peak, and the Dubai stock market index is already down by two-thirds from its high around two years ago.

The International Monetary Fund welcomed Sunday the decision by the United Arab Emirates central bank to pump liquidity into its banking sector.

"The United Arab Emirates is a strong resource-based economy and we welcome today's announcement by the central bank of the UAE making available to banks a special additional liquidity facility," a statement from the IMF said.

British bank Standard Chartered, which has huge operations in the Middle East, said the UAE central bank had acted "decisively and pragmatically" in moving to pump more liquidity into the sector.

"Their support for the banking system will underpin consumer and market confidence in the economy," said Standard Chartered chief executive Peter Sands.