World markets wait on Dubai’s debt crisis

Finance

Published: 27 Nov. 2009, 22:19

World markets wait on Dubai’s debt crisis

As shock waves from Dubai batter the local market yesterday, an investor looks at the electronic stock market board at a brokerage in Yeouido, Seoul yesterday. The Kospi shed 4.7 percent to 1,524.50 points, marking the steepest point drop since Nov. 6 2008. [YONHAP]

Growing signs that the property bubble in Dubai was about to pop sent shock waves through the local financial system yesterday, as concerned investors withdrew from emerging markets in many parts of the world.

The local benchmark stock market Kospi plunged 4.7 percent and the nation’s currency suffered its biggest fall against the dollar in more than four months, leaving analysts concerned over a lingering prediction that the government will have to delay the timing of its “exit” strategy.

“[What’s happening in Dubai] only proves that the recovery of the global economy as well as the local one is still far from a sure thing,” said Go You-sun, a macroeconomist at Daewoo Securities.

The Kospi closed at 1,524.35 points, down 75.17 points from Thursday’s close, according to the Korea Exchange, the local bourse operator. It’s the steepest plunge by points since Nov. 6 of last year, when the Kospi was slashed by 89.28 points at the height of the global financial crisis.

Foreigners sold 207.6 billion won ($175.9 million) worth local stocks on the Kospi in reaction to a proposal from Dubai World, a state investment company, to delay debt payments. Dubai has borrowed $80 billion for a series of construction projects, but due to the global recession, its property market has suffered the world’s steepest price decline.

“Given its exposure [to the current Dubai risk], the Kospi has dropped more than what it should have been, losing 30 trillion won worth market cap in a day,” said Kim Jung-hoon, an analyst at Korea Investment and Securities. According to the local financial authority, Korea’s financial companies may be owed a combined $32 million from Dubai World as of the end of September.

Buffeted by the sell-off on the stock market, the local currency fell by 20.2 won to the dollar, or 1.7 percent, to 1,175.35 won, the biggest loss since July 13.

Go at Daewoo said Dubai isn’t likely to develop into as big of a crash as the Lehman Brothers-triggered financial crisis. But, she said it requires shrewd government monitoring.

Woori Investment and Securities predicted the Bank of Korea will raise the base rate in the first quarter of next year, but the timing could be delayed, the brokerage said.

“Lurking risks at the global economic system like Dubai’s case could lead the government to delay an exit strategy,” said June Park, an analyst at Woori Investment and Securities.

By Moon Gwang-lip [joe@joongang.co.kr]