Background Information
Dubai World Company operates under a highly diversified spectrum of the industrial sector some of the segments include transport and logistic, urban development and investment which comprise financial services. The company manages and supervises a portfolio of business and projects on behalf of the government. As a result it has promoted Dubai to become a hub of commerce and trading activities. The company was established 2006 with work force of 50,000 workers (Watts, 2). As for GDP, it totaled $ 175 billion in 2006, while the Dubai part in this value was 21% (Watts, 65). The growth rate in 2011 will be 3,8%
Financial status of Dubai World Company before the global crisis
According to Prosser(2),Dubai World Company has invested extensively in real estates in United States, Britain and South Africa Since liquidity ratio which are also referred to as working capital ratio provide a firm’s ability to meet short term financial obligation. Dubai World Company had maintained a low liquidity ratio that indicated it had more assists than liabilities. Financial leverage ratio show long term solvency of a company. The company had relied mostly on short term loans that matured within a period of six months. It avoided long term debts, hence the low rate leverage ratio from lending institutions like Nakheel. Most of the funding to the company came from the government. This result it to have few debt obligations during the global economic crisis that affected major financial institutions in the world. Most of the investment initiative that the company had undertaken were profitable and had enabled Dubai to turn into an economic and commerce hub. It still remains the economic giant in the Middle East. Unemployment rate of this period equals 3.7%. GDP growth 8.7%, inflation rate – 9.3%. Budget balance difference between revenues and expenses totaled 13% to the side of expenses. Liquidity status of the State for the year 2006 may be regarded as one of the highest among world economies. This is explained by the fact that the state managed to adjust proper financial flow system with proper budget balance.
Financial status of Dubai World Company during the global crisis
Elgers and Murray (7) laments that as a result of the global economic crisis that hit the world, Dubai World Company proposed to delay payment of its debts for six months which was amounting to $26 billions. This caused market indices of many countries to drop. The financial crisis of 2007-2010 influenced Dubai World Company’s real estates to drop after a six years boom. As a result the company terminated employment of 10,500 workers world Wide.The company had a debt of $59 billion which accounted almost 75 percent of emirates $80 billion debt. As a part of the recovering measures from the global crisis Dubai government received $10 billion aid from Abu Dhabi as a refinancing plan. Houston and Brigham (6), suggest that as a result Dubai World Company repaid $4.1 billion to Nakheel, a real estate unit which was maturing on the same day. Dubai had also borrowed $80 billion four year construction boom meant to transform Dubai into a tourism and financial hub before the global economic crisis (Hall, 2). Unfortunately the recession caused it to suffer a huge economic slump. This made home shares price to fall 50 percent from the 2008 peak. According to bank of America, it was estimated that Dubai debts was $88 billion and its external debt almost 103 percent of its gross domestic product (Lynn, 1).
Unemployment rate of this period totaled 12.7% (2008). GDP growth was -4.2%, while the forecasted growth for the year 2009 was 3.5%. Inflation rate – 6.1%. Inflation totaled 11.1% with further growth to 12.3% in 2009. Budget for 2008 was reported as the largest in the history of UAE, and totaled Dhs 34.9 bln. Balance between revenues and expenses totaled 15%. Considering the liquidity rates Houston (251) emphasizes that the rates were high enough in the first half of the year 2008, while the emergence of global crisis made UAE freeze some programs and plans that decreased liquidity rates.
Financial status of Dubai World Company after the global crisis
According to Tinic and West (4), as part of regression, Dubai is experiencing high trading volumes and big number of dealers specializing in different economic areas. This is likely to increase the market value. There is a high correlation between market value and commodity prices. Dubai is also characterized by a high asset value and growths which have indicate statistically that the Dubai economy is improving tremendously. Dubai liquidity, leverage and earning variability are showing positive signs of recovering from the global crisis. In terms of profitability, the company has showed a strong indication of recovery with current net profit of Dh 688 million and a total income of Dh 2.5 billion. The current asset amounting to Dh 48 billion shows a strong financial performance of the company and its ability to meet cost of liabilities. The company also commands an asset base of Dh 13.99 billion and a low leverage ratio (Barnea and Logue 2).
Unemployment rate in 2010 totaled 4.2%. The state managed to decrease these rates in comparison with 2008-2009 rates by creating additional working places in the sphere of industry. GDP growth rate is still negative – -2.1%, however, the inflation rate was essentially decreased to 1.5%. Balance between budget expenses and revenues was Dhs. 6 bln with 20% deficit. Liquidity rates stayed comparatively unchanged in comparison with year 2009, though, it is forecasted that they will grow in 2011 for at least 5%.
Conclusion
Since many trading blocks that Dubai World Company had invested have recovered from economic recession.The investment the company made in those economies are likely to generate huge returns in the next five years. The company will also maintain a low leverage ratio since it will be able to repay all debts and venture in more investments. The company has invested in long term project like infrastructure and construction that will boost trade in Dubai. As a result of effective resources allocation this will influencing great efficiency (Weston, 11).
References
Barnea, Albert and Logue, David. The Effect of Risk on the Market Maker’s Spread,” Financial Analyst Journal.2007
Elgers, Peter and Murray, David. The impact of the choice of market index on the empirical evaluation of accounting risk measures. The Accounting Review.2005 pg358-375
Hall, Camilla. “Dubai Government Statements on Nakheel, $5 Billion Bond (Text)”. Bloomberg. 2007
Houston, Fred and Brigham, Elvis. Fundamentals of Financial Management. South-Western College Publishers.2009
Lynn, Lara. Dubai world: official statement on debt obligation.Emap limited.2009.
Morse, David and Ushman,Nelson. The effect of information announcements on the Market Microstructure. Penguin Publishers.2007.
Prosser, David “Head of Dubai World threatens to take his money out of Europe”. The Independent. 2008.
Tinic, Steve and West, Robert. Competition and the Pricing of Dealer Service in the Over-the-Counter Market. Journal of Financial and Quantitative Analysis.Vol.2 (4).2008
Watts, William. “Dubai woes roil financial markets: Stocks fall and government bonds rise on flight to quality”. MarketWatch. 2006
Weston, John. Essentials of Managerial Finance. Dryden Press, Hindale.1990