Dubai recovering and regaining confidence

Dubai’s outstanding debt is estimated at around $34.1 billion but it remains manageable as it accounts for only around 38 per cent of the GDP and the emirate’s economy appears to be rebounding, a key Saudi bank has said.

Over half of that debt, or around $18.5 billion, is taken on to finance the Dubai Financial Support Fund which has used the money to provide finance to Dubai’s government enterprises (GREs), specifically Dubai World & Nakheel, the Saudi American Banking Group (SAMBA) said in a five-page study on Dubai.

In theory these GRE’s have until 2014 to repay the DFSF through asset sales and their own revenues, the report said, adding that this should allow the government to meet the $20 billion spike in debt repayments in 2014 when its borrowings to fund the DFSF mature.

“The government’s current debt level appears manageable with respect to traditional indicators of debt to GDP, and the sovereign should be a solid credit risk (albeit still unrated),” said SAMBA, one of the largest Arab banks.

But it noted that the debt repayment burden is large given the government’s limited fiscal revenues of around $eight billion a year, and that the budget is running a deficit of $1-1.6 billion a year.

Interest payments have risen from zero in 2007 to $2.4 billion in 2010, the report said, quoting figures by the International Monetary Fund.

“It is thus critical that the government continues to have access to capital markets at reasonable rates and takes measures to strengthen its fiscal accounts,” it said. “In addition, improvements in GRE finances will be key to the long term financial health of the emirate, and their repayment of the DFSF as planned is necessary to avoid the otherwise unaffordable spike in government repayments in 2014.”

Citing official data, the report said confidence is improving in Dubai as its non-oil sectors have begun to pick up, while restructuring and refinancing agreements are providing the Emirate with more time to sort out its finances.

Real GDP data through 2010 show that trade, transport, communications, hotels and restaurants all performed well, and available data show this trend continuing into 2011, it said, citing figures by the Dubai government.

Real GDP in Dubai, the second largest UAE emirate, grew by 2.4 percent in 2010 and is likely to hit around 3.5 percent this year, the report added.

“In addition, the struggling real estate sector has recently received a boost from the UAE federal government’s decision to extend visas for real estate investors from six months to three years,” Samba said.

“Long term residency visas will improve the attractiveness of second home purchases in Dubai and should help raise demand, including from those looking for a safe haven from recent regional unrest. While this development may help stabilize the market, prices are still likely to remain weak as a large amount of new supply is scheduled to be delivered over the next 24 months.”

Samba said it believes the recovery will tempt markets to provide finance to Dubai as evidenced by the latest successful $500 million government bond issue under its expanded Euro MTNP, the proceeds of which are earmarked for construction spending and budget finance.

“Dubai sovereign CDS spreads and bond yields have been falling in recent months, suggesting that investors are confident that the government will have the means and willingness to make repayment of its direct debts a priority,” it said.

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