Dubai debacle casts shadow on markets

Seoul financial authorities played down yesterday the possible impact Dubai’s financial debacle will have on Korean markets.

But experts expressed concern that Seoul financial markets will take a beating as investment sentiment around the world rapidly sours, especially among European financial companies that heavily invested in Dubai.

Top officials of Korea’s Financial Supervisory Service and the Financial Services Commission, held an emergency meeting yesterday in Seoul to discuss possible impact to the market and map out responses. “Korea has little exposure to Dubai bonds and has shown more positive recovery in the financial sector and the real economy, which helped improve foreign investors’ perception of the Korean economy,” said Kwon Hyouck-se, vice chairman of the Financial Services Commission, after the meeting. “The impact [of the Dubai debt default] to the Korean financial markets will be highly limited.”

Dubai World, a real estate conglomerate controlled by the city-state of Dubai, owes roughly $60 billion and has payments of billions of dollars in the upcoming weeks. Dubai last week announced a six-month “standstill” on repayments, which some investors considered a flat-out default. Investors are holding their breath to see whether Dubai’s financial woes will send a ripple effect through global financial markets.

Korean financial institutions have investments or lending to Dubai of $88 million, including $32 million specifically made to Dubai World. All Korean lending or investments to United Arab Emirates amount to $221 million. But exactly how much Korean banks have put into Dubai may be irrelevant. Korean companies had relatively minor exposure to Lehman Brothers when it collapsed in September 2008, yet were struck hard by its demise. The subsequent credit crunch around the world and flight of foreign investors pummeled Seoul markets.

According to the Bank of Korea, foreign investors hold Seoul stocks worth $224.2 billion and bonds worth $149.3 billion as of late September. But many of them, particularly in Europe, have dumped their holdings. They posted the net selling of 41 trillion won ($34.95 billion) in stocks and 48 trillion won in bonds so far this year. German investors topped the list, unloading Korean securities worth 5.2 trillion won, followed by 2.4 trillion won by those from Luxembourg and 2.1 trillion won from Britain. And European financial institutions are one of the biggest investor groups in Dubai, holding nearly half of the Dubai World bonds. If the European investors try to offset their losses by selling stock and bond holdings in Korea, chances are Seoul currency and stock markets could experience a sharp downturn.

Also, Korean lenders may face a serious foreign currency shortage if the financially squeezed European financial institutions decide not to extend loans to Korean counterparts. “If Dubai shock spreads around the world, including the European financial companies, the Korean financial market may experience quite a bit of turbulence, and construction companies will also take a beating,” said Yoo Byung-kyoo, chief researcher at Hyundai Economic Research Institute. “The situation can get worse if there is not timely international coordination.”

By Jung Ha-won, Kim Won-bae [hawon@joongang.co.kr]