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Mon 30 Nov 2009 01:22 PM

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UAE markets tumble on Dubai debt reaction

UPDATE 7: Dubai shares tumble and Abu Dhabi's index falls most in at least eight years.

Dubai shares tumbled and Abu Dhabi’s stock index fell the most in at least eight years on the first trading day since the government announced state-run Dubai World, with $59bn of liabilities, may delay debt payments.

The Dubai Financial Market General Index dropped 7.3 percent to 1,940.36, the biggest decline since October 2008. Abu Dhabi’s ADX Index tumbled 8.3 percent, the most since Bloomberg began compiling the data in 2001.

“Investors are not separating between Dubai and Abu Dhabi,” said Yazan Abdeen, a fund manager at ING Investment Management Ltd. in Dubai. “Country risk does not separate between cities.”

The plunge in the emirates’ stocks follows the biggest declines in Asian shares in three months last week and Europe’s worst rout since April amid investor concern the proposal for Dubai World to delay debt payments risks triggering the biggest sovereign default since Argentina in 2001.

The UAE central bank said it “stands behind” the country’s local and foreign banks as they face the prospect of losses from Dubai World. Banks will be able to borrow money from the regulator for half a percentage point above the three-month local benchmark interest rate, the Abu Dhabi-based Central Bank of the UAE said in an e-mailed statement on Sunday.

The statement helped push developing-nation stocks higher on Monday, with the MSCI Emerging Markets Index climbing 1.2 percent, its biggest gain in two weeks. The dollar retreated and commodities rose.

Dubai credit-default swaps tightened for the first time in a week, declining 72 basis points to 574 basis points, according to prices from CMA Datavision. Abu Dhabi default swaps, which fall as the perception of credit quality improves, tightened 29 basis points to 146 and contracts linked to DP World dropped 101 basis points to 642.

Emaar Properties, the biggest property developer in the UAE, tumbled the most in five months, losing 9.9 percent to AED3.75. Its ratings were cut by Standard & Poor’s Ratings Services and Moody’s Investors Service Inc last week.

National Bank of Abu Dhabi slipped 9.7 percent, its biggest one day drop in five years, after the UAE’s second- biggest lender said it is owed $345m by the Dubai World group.

DP World fell by the maximum limit allowed by Nasdaq Dubai regulations, declining almost 15 percent to 37 cents, set for its biggest one-day loss since February. Dubai World is the parent company of DP World, the Middle East’s biggest port operator. The company said on November 26 it is not included in the restructuring process announced for Dubai World.

“Unless we get a statement from the government clarifying things, we’re going to see an ugly few days,” said Haissam Arabi, head of the Gulfmena Alternative Investments hedge fund in Dubai.

Dubai World, whose majority stakeholder is the emirate’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, borrowed from more than 70 lenders to buy assets ranging from stakes in Las Vegas casino company MGM Mirage to London-based Standard Chartered Plc through Istithmar.

Dubai’s government said last week that Dubai World will seek a “standstill” agreement to delay repayment of its debt, including $3.52bn of bonds due December 14 from its property unit Nakheel. The announcement came less than two hours after Abu Dhabi, the capital and wealthiest emirate in the UAE, bought $5bn of Dubai bonds as part of a $20bn support fund to help reorganise state companies. Markets were closed from November 26 to 29.

Nakheel asked Nasdaq Dubai on Monday to suspend its bonds until it provides further information to the market.

“Investors are angry,” said Eric Swats, a partner at Rasmala Investment Holdings in Dubai. “Investors will be cautious to put money in this region and will require a greater risk premium.”

UAE stock markets are open for two days before closing for another four-day holiday weekend commemorating 38 years since seven Gulf sheikhdoms formed the UAE.

“Sentiment is really appalling,” said Mark Friedenthal, a fund manager at Abu Dhabi Commercial Bank. “Foreign investors will be dumping for a few days and the risk premium for the whole market has spiked.”

The Dubai Financial Market Index has climbed 18 percent this year, trailing the 68 percent advance in the MSCI Emerging Markets Index. Dubai authorities changed the regulated movement of most stocks last year to 10 percent from a maximum of 15 percent down in a bid to limit losses in a single day after the credit crunch led to declines in equity markets across the globe.

Markets in Saudi Arabia, Qatar, Kuwait, Oman and Bahrain were closed on Monday for the Eid al-Adha holiday.

The cost of protecting against Dubai’s government reneging on obligations doubled last week to as much as $647,000 a year to insure $10m of Dubai debt. That is still less than the price of $1m, or 1,000 basis points, associated with borrowers considered distressed. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to debt agreements.

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