A little more than a month ago, the IMF said recovery in the Middle East is aking hold. But perhaps it spoke too soon, because just as IMFs views on global recovery gained a following, Dubai dropped a bombshell - requesting a standstill in debt repayments that sent shivers across global markets.
Standard & Poors and Moodys immediately downgraded all six state-backed corporations in Dubai, downgrading some to even junk status. The spreads on its sovereign credit default swaps - a measure of the cost of insuring debt against potential default - that had eased from 944 basis points on February 13 to about 318 bps by November 24, jumped to 594 bps by November 30.
Similarly, the price-earnings ratios that had more than doubled to about 25x since the beginning of the year plummeted to around 10x as the trade screens have been painted all in red across the board.
For Pakistan, this fallout may have a variety of implications; some direct, some indirect.
Perhaps, the single biggest impact would be on the premium Pakistan would have to offer on its $500 million Eurobond issue currently planned to be marketed in January. A delay in floating the bond might help reduce the cost, but that would add pressure on fiscal deficit.
Second, if Dubais financial stress spills over into the entire UAE - which isn a far off remote possibility as such - Pakistans fragile FDI inflows may squeeze accordingly, while the exports might face a minor jab as well.
Although, annual dollar inflows from both these avenues are modest, together - especially after including workers remittances from the region - these inflows make a notable sum, implying that Pakistan isn entirely cushioned from the potential crises.
Meanwhile, the KSE is likely to witness further downside not because foreign portfolio inflows from Dubai are significant but because the benchmark KSE has historically tracked the weakness in the region and elsewhere. So, if liquidity in the investment community dries out for the regional markets, amid a pre-Christmas withdrawal, then local equities would have had it.
Lastly, on a more global perspective, the not-so fancy story of Dubai has unveiled two bitter possibilities.
One, that there might be plenty of bad news to come by means of a ripple effect, keeping in mind that Credit Suisse has suggested that European banks may have about $40 billion exposure to Dubai debt.
And two, the notion that this isn the worst of it all, with plenty of sore truth hidden beneath the rubble - a kind of an echo bubble the contrarians have been warning about of late. If thats really the case, the global economy may be at a tipping point - so much for the recovery hopes and so much for the glitzy Dubai dream.
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