Dubai neither doomed to fail, nor a safe haven: BofA-ML

While the worst is definitely a view that’s visible from a rear-view mirror in Dubai and there are a number of positives that are fast emerging, the emirate is yet to have fully emerged from its financial problems, a new report has said.

“The consensus has moved quite a bit over the past two years on Dubai, swinging from doom and gloom on Dubai World restructuring to an Arab safe haven in H1, 2011,” pointed out Bank of America-Merrill Lynch’s (BofA-ML) MENA Quarterly report dated October 20.

“It is true that a significant headway has been made on debt restructuring and Arab spring has diverted tourists, businesses and financial capital into Dubai,” BofA-ML analysts acknowledged.

“Still, we see scope for Dubai economy to slow down, debt rollovers to become more challenging, and asset quality to further deteriorate if the European debt crisis evolves into a full blown financial crisis,” they added.
 
“While deleveraging strains [for Dubai] have eased, they have still not yet dissipated,” the report said. “Following successful refinancings/restructurings, Dubai has a six- to nine-month window before the more problematic maturities in the second half of 2012. Still, ongoing restructurings pose some risk. Including those, Dubai has $6.7bn left to service in 2011. However, a post-restructuring schedule excluding government, guaranteed and bank debt brings this figure to $1bn, much of which has been pre-financed,” it said.

“The recent passage of a new public debt law in the UAE is positive and may diminish deleveraging strains. The law paves the way for federal debt issuance (the UAE first sovereign bond), as well as local issuance by local governments. It is also likely to help shelter Dubai from refinancing risks in the international markets, as it could tap local liquidity in the domestic market instead,” the report highlighted as one of the positives for Dubai’s finances.

“However, given the timeframe for issuance of federal bonds, we do not expect this to impact the continued restructuring of Dubai Inc. debt in 2011,” it said, adding that the UAE has benefited from “high oil prices, higher oil production, and a favourable external environment” although further economic growth remains dependent on global factors as well as constrained by “a still large real estate supply overhang”.

The BofA-ML report noted that “Dubai’s service-based economy has also further benefited from diverted regional capital flows following unrest in Bahrain and increased liquidity in the banking sector”.

However, it said that the “global backdrop could become more challenging now” and revised UAE’s growth upwards to 3.9 per cent (up from 2.8 per cent previously) in 2011, but cut growth to 3 per cent from 3.5 per cent previously in 2012 in the UAE.

“Domestic demand seems to have rebounded, judging by high-frequency counterparty import data and a pick-up in non-food, non-housing CPI inflation. Imports of Japanese construction services remain still in the doldrums however, pointing towards weak construction activity. Nevertheless, credit to the private sector remains unsurprisingly weak and the loan book of the banking sector grew by 2.5 per cent year-to-date. External factors (tourism with Dubai airport passenger numbers up 9.7 per cent yoy in July but just 0.8 per cent yoy in August, re-export activity) have all lent Dubai support over the first part of this year,” the report said.

Regionally, the global bank says that “compared to 2008, the region is broadly in a better shape to weather the global slowdown. Progress on corporate deleveraging, more robust banking systems, higher but broadly still reasonable breakevens, a heavy infrastructure pipeline and sovereign wealth are likely to cushion the global downturn.”

The bank sees Mena/GCC GDP growth at 5.8 and 6.9 per cent, respectively, in 2011 (vs. 4.7 and 5.2 per cent previously). “We cut 2012 Mena/GCC growth to 4.0 and 3.9 per cent (vs. 4.7 and 4.9 per cent previously) mainly due to our expectation of flattish oil production in 2012 but still strong non-oil GDP growth, and higher base effect.”

Follow Emirates 24|7 on Google News.