Dubai and Abu Dhabi’s stock markets are expected to be hit hard on opening tomorrow, after the Dubai government asked for more time to pay its debts.

Dubai World, the parent company of major firms including Nakheel and DP World, wants to suspend its debt payments for six months while it changes how it operates.

The group has an overall debt of $59 billion, which comprises three-quarters of the emirate’s total debt of $80 billion.

Analysts say that the move has raised fears about how Dubai will repay its debts and these fears will lead to investors selling off stocks.

“I believe that profits of many banks of the region will be negatively affected. Some will end 2009 in the red because of the provisions they must take,” Saudi economist Abdulwahab Abu-Dahesh said.

“It’s a very serious and severe problem that is likely to shake up the Gulf financial system as a whole. I expect Gulf bourses to dive like the September crash last year”, following Lehman Brothers bankruptcy, he said.

On Thursday, Sheikh Ahmed bin Saeed Al Maktoum, chairman of the Supreme Fiscal Committee, said the debt suspension was “carefully planned” and with “full knowledge of how the markets would react”.

He also said “further information will be made available early next week”, but did not offer details.

News of the debt suspension came after Gulf markets had closed for the four-day Eid Al Adha break, giving no chance to respond.

Asian markets were pummelled by concern for the global recovery on Friday, fuelled by worry over Dubai debt.

European markets fell dramatically on Thursday, but recovered on Friday as world leaders such as UK Prime Minister Gordon Brown urged investors to calm down.

However, analysts expect UAE markets to weaken tomorrow when they reopen, and some are predicting long-term effects on investor confidence.

“I think it has affected investor psychology in a very fundamental way.

It’s a huge wake-up call to the region,” Norval Loftus, the head of Islamic debt at Matrix Group, in London, told 7DAYS.

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