In numbers

$17-18bn: Estimated amount of debt falling due for Dubai in 2011-12

5 per cent: Cut in Dubai’s budget for 2011

$24.9bn: Amount of liabilities restructured by Dubai World in 2010

Sources: MEED; Samba

Debt has become an unfortunate byword for Dubai’s economy over the past couple of years. This reached a climax in late 2009 with the announcement of a debt repayment standstill from the emirate’s flagship state-owned holding group Dubai World.

The subsequent 12 months have seen the authorities attempt to rescue their financial credibility, restructuring Dubai World’s debts and easing the repayment burdens facing the Dubai entities most affected by the emirate’s credit problems.

Much of the gloom was lifted in September 2010, when Dubai World announced the restructuring of some $24.9bn of liabilities, of which $14.4bn is owed to creditor banks and the remaining balance to the Dubai government.

Slow recovery in Dubai

That coincided with the emirate’s return to the debt capital market, with a $1.25bn Dubai bond issue that was four-times oversubscribed, defying sceptics, who anticipated the emirate would encounter problems tapping the markets so soon after the Dubai World debacle.

With contractors now starting to be paid and the 2010 Dubai budget deficit half the previous year’s level, there is good reason for the sense of economic optimism in the emirate. 

There are reports of steady progress in resolving the $12bn debts owed by Dubai Holding, an investment company owned by the ruler Sheikh Mohammed bin Rashid al-Maktoum. It recently secured a five-year extension on $555m of debt. Meanwhile, Dubai World’s property development subsidiary Nakheel, which defaulted on a sukuk in late 2009, repaid its final capital market debt instalment in January 2011.

But none of this means that Dubai’s, or the UAE’s economy, is out of the woods just yet.

“Dubai faces a tough task in meeting its large debt obligations falling due over the next 12-24 months,” says Andrew Gilmour, senior economist at Saudi Arabia’s Samba Financial Group. “These are estimated at around $17-18bn a year. The authorities will be eager to secure additional restructuring with Dubai Holdings to reduce this burden.”

The debt legacy will have a material impact on the UAE economy, which shrank by 2.1 per cent in 2009

Samba notes that the short-term repayment profile will be testing for Dubai, particularly as the government’s own finances are already strained, running a budget deficit projected at $600m in 2010. This places added onus on the authorities to ensure that its state-backed entities are on a firmer financial footing.

Official statements designed to reassure the markets about the viability of state-linked entities are no longer taken at face value.

“Dubai also needs to put the finances of its state-owned enterprises in order. This is something the authorities are pursuing, but progress is hard in the face of weak real-estate markets,” says Gilmour.

Some progress has been registered in agreeing debt repayment extensions, as with Dubai Holding. MEED understands that the latter group, and its subsidiaries, expect to conclude the restructuring process on its full debts by the end of 2011.

Dubai World subsidiary DP World has announced its intention to refinance outstanding debts under its $3bn syndicated revolving credit facility in 2011. With the refinancing, DP World would strengthen its liquidity profile and, says Moody’s Investors Service, possibly extend its debt maturity profile.

Dubai’s Supreme Fiscal Committee is now concentrating on completing Nakheel’s more than $10bn-worth of debt, with a sukuk issue expected in the first quarter of 2011 to repay trade creditors.

Dubai debt legacy

Dubai Holding financial arm Dubai International Capital in 2010 finalised a deal to restructure $2.5bn in debts. Yet, concerns remain over another Dubai Holding financial unit, Dubai Group, which is reported to have missed interest payments in November 2010 on a $330m loan. Dubai Group, which holds interests in Bank Islam Malaysia, has to negotiate a restructuring of some $6.2bn in debts.

Dubai government debt, $bn
Public notes
Euro Medium Term Notes  3
Dubai DOF sukuk  1.9
Bilateral/syndicated facilities 
Multicurrency Ijarah (2009)  0.4
Ijarah (2010)  0.3
DOF China Construction Bank facility 1
Investment Corporation of Dubai obligations  6
Related party debt 
Government of Dubai $10bn notes  10
DOF Abu Dhabi $10bn  7.3
Total 30
DOF=Department of Finance. Source: Samba

Though further Dubai World debt standstills are not anticipated, this still leaves a substantial financing challenge for the emirate. “We don’t expect to see any debt incidents going forward, although the debt servicing remains challenging,” says Monica Malik, chief economist at Egyptian investment bank EFG-Hermes.

Malik says the restructuring programme has helped to reduce debt servicing obligations in 2011 and she expects to see some further finalisation of Dubai state entities, namely Dubai Holding.

The debt legacy will have a material impact on the UAE economy, which shrank by 2.1 per cent in 2009 and saw growth constrained at an estimated 2.4 per cent in 2010. Although analysts predict a rise this year – EFG Hermes anticipates 2.9 per cent real gross domestic product (GDP) growth in 2011 – this is below the GCC average.

With continued late payments from government entities and a contraction in infrastructure spending, attempts to kickstart growth could be frustrated this year.

As the Dubai economy still accounts for a major chunk of the overall UAE economy, the resulting drag effect will have a wider impact on the federation’s performance as a whole. “The domestic environment continues to face a number of headwinds,” says Malik. “This includes Dubai companies and individuals being highly leveraged and with large exposures to the real-estate sector. Banks are also highly exposed to the real-estate sector.”

Unlike other Gulf states, where government spending has been a major driver of economic growth, Dubai has reduced capacity to fund major increases in expenditure.

Dubai’s spending squeeze

Dubai’s debt obligations have forced a tightened fiscal stance. “This year, we expect to see another contraction in spending and we expect that to continue into the medium term,” says Malik.

Dubai has announced a 5 per cent cut in its budget for 2011, with spending down to AED33.7bn ($9.18bn), from AED35.4bn in 2010. This should keep Dubai within the deficit limits outlined by the Supreme Fiscal Committee, of no more than 3 per cent of GDP. The federal budget for 2011 forecasts expenditure to decline by AED2.6bn to AED41bn over 2010.

“Domestic demand is going to remain muted with these pressures,” says Malik, underlining the impact of deleveraging, lower real-estate prices and further restructuring. 

EFG Hermes sees the UAE as having the weakest domestic demand environment in the GCC region, with structural challenges in Dubai adding to this. It lowered its GDP growth forecast from 3.4 per cent to 2.9 per cent, with slower spending in Dubai and fewer projects in Abu Dhabi.

It is the latter economy that will be the source of any expansionary fiscal approaches in 2011, although even the oil-rich emirate’s finances will be affected by domestic housekeeping priorities. Abu Dhabi is expected to contribute about 18.8 per cent fewer funds to the country’s federal budget in 2011, compared with 2010, according to a proposed budget document, as it aims to balance its own budget in 2011. 

Dealing with debt obligations will have other effects beyond limiting public spending. In particular, bank lending will remain constrained by balance sheet strains stemming from restructured loans and concerns over additional impaired assets, says Gilmour. “Slower credit growth will dampen investment, consumption and growth prospects throughout the UAE,” he says.

Although focus has understandably been absorbed by the debt restructurings, the Dubai government will have to think more clearly in 2011 about finding new ways of raising money. It will need to sell some of its most prized assets, if it is to yield more revenue to the state treasury.

The Dubai government has limited revenue-raising options at its disposal. According to Samba, the bulk of its revenues come from a range of fees, from oil and gas operations, and from investments made by the government. Tax revenues are almost entirely from customs charges, as Dubai does not levy any income tax on individuals or businesses.

“In this context, Dubai is essentially limited to raising various fees it charges, although it may be reluctant to do this for fear of dampening any recovery in economic activity,” says Gilmour. “The main fee revenues come from land-transfer and mortgage-registration fees, immigration and visa-related fees, tourism-related fees (including hotel taxes), aviation-related fees and other transport-related fees. Introducing value-added tax would be a way to raise revenues, but this cannot be done until there is a GCC-wide agreement.”

Asset sales will therefore have to form a significant component of any wider UAE economic recovery programme. Mohammed al-Shaibani, director-general of the Dubai ruler’s court and the chief executive of the Investment Corporation of Dubai has ring-fenced offshore assets, as these need to show returns before sales would be viable.

Several companies lend themselves as steady revenue generating assets that could fetch a good price, headed by flag-carrier Emirates Airlines. Other assets frequently named as potential for sale include ports operator DP World – already in the throes of hiving off its overseas holdings – the utility Dubai Electricity & Water Authority and Dubai Aluminium.

Moving ahead

However, enthusiasm for selling off the family silver is tepid. At a press conference in November 2010, Sheikh Ahmad bin Saeed al-Maktoum, chairman of the Dubai Supreme Fiscal Committee, expressed a reluctance to sell assets at this time, preferring to ask creditors for five to eight years leeway to realise value before going ahead.

On the positive side, Dubai does not expect to go through the humbling experience of having to ask Abu Dhabi to bail it out this year, as it did in late 2009. Ahmad Humaid al-Tayer, another member of the Supreme Fiscal Committee, has confirmed Dubai will not need further financial support from Abu Dhabi to fulfill its debt obligations in 2011.

The progress made in the past 12 months will reassure investors that the UAE economy is not on the verge of a precipice, even if its growth is lagging its Gulf neighbours.

The restructuring agreement and access to new funding will provide a tailwind to Dubai’s economy, which is already showing signs of growth in its core areas of trade, logistics and tourism, noted Samba in a report on the UAE economy issued in November 2010. Other indicators show acceleration in UAE private sector output between June to September 2010.

With a combination of restructuring, asset sales and refinancing, there is room for optimism that Dubai will be able to manage in 2011, but progress will need to be carefully monitored and access to external funding remains critical.