A year since the bottom fell out of the credit markets, the legacy of boom-time borrowing continues to weigh heavily on Dubai.
Some progress has been made. In February, Borse Dubai secured short-term refinancing for a $3,8bn loan due at the end of that month. Just over a week later, Dubai’s government announced a $20bn bond programme and immediately sold half that amount to the Central Bank of the UAE. Breathing space was created.
But Dubai’s debt struggle is about to enter a new phase. Nakheel, the government property firm, is due to repay a $3,500 million sukuk and other debts by the end 2009. The emirate’s debt service burden rises still further in 2010 and 2011.
Nevertheless, the gloom that descended over Dubai’s short-term prospects at the start of the year is lifting. The bond programme enjoys Abu Dhabi’s implicit support. Oil has been above $70 a barrel since the start of August and is likely to stay there. Confidence is rising that Dubai will meet its immediate financial obligations.
People are now foucusing on the long term. On 22 August, EFG-Hermes reported that Dubai’s debts totaled $84bn, about 10 per cent more than most people had previously thought. This is about 150 per cent of Dubai’s 2008 gross domestic product (GDP).
The figure created ripples among observers of Dubai’s financial affairs. But it was far lower than an estimate published earlier in the month by the Wall Street Journal which reported Dubai’s debts could be $130-150bn. That would make them almost three times its likely 2009 GDP. It would also place Dubai in bad company. The figure for Zimbabwe, the world’s most severely-indebted nation, was 220 per cent in 2008 according to CIA website estimates.
The difference between the EFG-Hermes debt number and higher figures from elsewhere is mainly attributed to borrowing by Dubai government-related entities that had not been previously made public. For example, Nakheel said in a filing on 31 July that Dubai World, the company’s holding company, had almost $60bn liabilities. EFG-Hermes concedes its debt figure may not be complete.
Dubai’s government is yet to release a definitive debt figure. But even if it is no more than EFG-Hermes’ estimate, Dubai needs a new financial strategy. Before the crash, the plan was simple. Borrow short-term, sell land to developers and use the proceeds to pay off what was owed. But that approach won’t work now and it may never work again.
Dubai consequently faces a crushing short-tem debt service burden. According to EFG-Hermes, interest and principal combined will rise to more than $13bn in 2010 and to almost $20bn in 2011 before falling to $15,7m in 2012. That’s at least 25 per cent of Dubai GDP each year.
It is times like these when a lifeline would be handy. The start of the Iran-Iraq war made Dubai an attractive trans-shipment centre and Jebel Ali boomed as a result. The 2003 invasion of Iraq helped triple oil prices and increased the flow of goods and people through Dubai airport. Low interest rates fuelled demand for Dubai real estate. Something unexpected may turn up again. But it is difficult to see what that might be this time.
Dubai’s more responsible creditors have argued for years that it needs a coherent long-term debt management strategy. In the current circumstances, this would entail restructuring its debts over much longer periods. If the repayments were made over 25 years, it would cut the annual debt service burden to 2030 to under $10bn. This would still be more than 10 per cent of GDP in the next three years. But it would be less than half of what’s needed in 2011 under the present debt service schedule.
Borrowing is not always bad. Big debts are evidence of ambition and a spur to greater efficiency. Dubai is different to Zimbabwe and other countries at the top of the debt/GDP league in three key ways. It is part of one of the world’s richest countries and the consensus is that Abu Dhabi will not allow the emirate to default. Dubai is still the best place in the region for business people to live because of its enormous oil and gas reservoir, and GCC GDP should at least double in less than a generation. Finally, Dubai is well run, even compared to the standards of some European countries.
But paying off Dubai’s debts will not be without costs. With no alternative in sight, it is certain that more will have to come from within the emirate itself. And it is no longer a question of if or when, but how.