Dubai has come a long way since narrowly avoiding a default in late 2009. It has successfully restructured tens of billions of dollars of debt at various entities, the economy has bounced back and investor confidence has returned.
All of this is good news for the emirate, but masks the problem still lurking behind the scenes. Debt owned by the government or government-related firms is still about $110bn, more than 100 per cent of gross domestic product. There have been no significant asset sales to reduce the debt burden.
As a result, a distinction has emerged in the risk perception of different entities in the emirate. The crown jewels, like Jumeirah Group, Emirates airline and DP World, are all able to borrow at cheap rates in recognition of their good performance.
Other cash-strapped entities, such as Dubai Holding, find it much more difficult to get decent terms out of the banks. As a result, Dubai is pushing its borrowing away from holding companies down to where the assets and cash flows are. This is what is driving the decision to get Jumeirah Group to borrow $1.4bn to pay off about $1bn of outstanding bonds at its parent company, Dubai Holding.
With low debt and good cash flows, Jumeirah Group will get a better deal than Dubai Holding. The deal suggests that rather than give up long-term control of its best assets by floating them on the stock market, Dubai may simply mortgage them to pay off the debts elsewhere.
This strategy will help shift debt away from entities that will struggle to repay it, and will probably help in the short-term. But it shifts the debt burden onto entities that were not responsible for it, which could limit their ability to generate much needed growth in the future.