During the first few months of the year, Dubai’s state-owned companies have engaged in a flurry of activity as they try to tackle their debts.

Drydocks World, part of debt-laden conglomerate Dubai World, is trying to use new legislation to force through the restructuring of $2.2bn of debt on minority creditors. Dubai International Capital (DIC) has agreed the terms of a $2.5bn debt restructuring with its lenders. Meanwhile, Jebel Ali Free Zone (Jafza) and DIFC Investments, the investment arm of the Dubai International Financial Centre, are both trying to refinance debts to avoid having to restructure them.

If all these negotiations go well, Dubai will have successfully refinanced its debt commitments for the year after coming dangerously close to a default in 2009.

A sustainable recovery is not quite under way and the government is now hard at work trying to develop a new 2015 economic strategy. The new plan is expected to rely less on the hopeful, ‘build and they will come’ strategy of the past, and more on selling what strategic advantages Dubai already has.

Core sectors in the UAE

The government wants to expand on the emirate’s current success stories, notably in trade and tourism. It also aims to consolidate poor performing sectors to help them out of the present slump.

The challenge in achieving this will be twofold. The main engines of the economy are externally driven and Dubai’s constrained financial position limits its ability for stimulus spending, as well as posing a longer term refinancing risk.

The progress made in managing debts accumulated during the boom times is not the only good news for Dubai. After the slowdown in 2009, the economy has recovered quickly. Dubai’s gross domestic product (GDP) shrank by more than 2 per cent in 2009, before rebounding the next year to about 2.5 per cent, according to the Department of Economic Development (DED). In 2012, growth is forecast to be between 4.5 per cent, according to the DED, and a more modest 2.4 per cent, according to the UK’s Standard Chartered.

Either way, it is the positive momentum in the economy that is important, not necessarily the size of the figure, says Marios Maratheftis, head of research, Western hemisphere at Standard Chartered.

He adds that growth in Dubai’s economy is now in more sustainable areas, rather than the speculative real estate-led growth of 2004-08. Passenger traffic at Dubai airport was up 14 per cent year-on-year in January. Trade is also picking up.

The emphasis over the past few years has been mainly on restructuring debt, rather than reducing debt

Banker in Dubai

The other good news is that Dubai is thought to have spare capacity in the economy of about 15 per cent. This means the government can comfortably go through a few years of growth without having to invest in new infrastructure. This is fortunate as the government is desperate to balance its budget, which has been in deficit for the past few years.

Eurozone worries

Not everything is positive though. Despite indications that refinancings due this year will be successfully managed, there are concerns about the knock-on effect of the eurozone debt problems on international banks and their appetite to rollover loans in Dubai.

The government has limited resources, so it will only come in with support when absolutely necessary

Dubai-based banker

The Switzerland-based Bank of International Settlements says lenders that report to it have $52.6bn of loans in the UAE maturing in 2012. This, coupled with demand for loans to refinance old debts, means new credit to the economy will be tight.

Dubai’s economy is now more tied to the fate of other economies in the world. More worrying is that in the past it has been concentrated on a few countries.

Mohamed Lahouel, chief economist at the DED, says Dubai is overly reliant on trade with India in particular and that diversification in the commodities traded through Dubai is also quite low.

One of Dubai’s key initiatives to ensure a period of sustained economic growth will come in the form of the revised 2015 masterplan. The original plan was formulated in 2007 and envisaged Dubai’s economy growing at an average of 11 per cent a year and with GDP hitting $108bn by 2015.

The new plan will recognise that those ambitions are now unrealistic, say sources close to the review process. No official figures for the size of the economy have been released for several years, but by end of 2011, it was thought to still be significantly lower than $100bn.

Lahouel says the 2015 plan will focus on building on the core parts of Dubai’s economy. This includes transport, tourism, trade and manufacturing. It is also expected to try to diversify Dubai’s mix of trading partners to ensure greater resilience.

The new plan will attempt to consolidate stressed sectors such as real estate and construction, which are expected to continue to be a drag on growth in 2012. The contribution of the construction sector to Dubai’s GDP is expected to shrink by about 2.5 per cent in 2012.

Details awaited for UAE economic masterplan

Few details of how the 2015 plan will seek to achieve these aims are available. The plan is still being worked on by the government.

Sources close to its development have indicated that it was due for approval by the Dubai government in late March after being presented to Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Dubai Economic Sector Committee and deputy chairman of the Dubai Executive Council.

It is also unclear if the new document will be published like its precursor was, or if it will just act as an internal document for steering policy.

Whatever happens, Dubai needs to consolidate its position as the region’s premier business and tourism hub. In the short term, Dubai is likely to benefit from the anti-government protests in Bahrain as international banks look to relocate their offices, and from the slowdown in activity in Abu Dhabi.

The Dubai International Financial Centre says that it is already nearing full capacity and has several new buildings opening this year to ensure space is available for the emirate’s thriving banking sector. The challenge will be filling the space, while the global banking sector remains in the doldrums. Another goal of the 2015 plan will be ensuring that the government has the right policies in place to allow state-owned firms such as Dubai World and Nakheel to demonstrate good growth over the next few years. That will be key to reassuring creditors that have already restructured loans to the two, along with other debt-laden government firms, to rollover those commitments again.

“The emphasis over the past few years has been mainly on restructuring debt, rather than reducing debt,” says one banker in Dubai. Even if Dubai hits its goal of $108bn GDP by 2015, it would still have a debt-to-GDP ratio of about 100 per cent.

The strategy of the emirate is now focused expanding its economy to the size that it can manage its debt burden, rather than shrinking the debt level to a manageable size.

The growing sense of optimism that 2012 will pass without a destabilising credit crisis like the one that rocked global financial markets in 2009, when Dubai said it would restructure $25bn of debt held by Dubai World and Nakheel, is tempered by this longer term view.

Several other government-owned corporates are also still locked in restructuring talks, most notably Dubai Group with about $10bn of debt and $1.6bn on Zabeel Investments, controlled by Crown Prince Sheikh Hamdan bin Mohammed al-Maktoum.

The worrying sign for them is that unlike in the case of Dubai World, the government appears to be withdrawing from providing financial support to other restructurings.

“The government has limited resources, so it will only come in with support when absolutely necessary,” says another Dubai-banker, who has worked on several debt restructurings in the emirate over the past two and half years.

“The positive signs are that the government seems to be much more in control of the situation than it appeared to be in 2009, when everything seemed to be left to the last moment before decisions were being made.”

Centralised approach to managing Dubai’s debts

Other sources say that while the government is not currently playing a role in providing financial support, it remains actively involved in helping to manage the debt workouts that are under way to ensure that there are no nasty surprises.

The government has also built up a significant following in the debt capital markets through international bond issues. That should enable it to raise additional cash if it needs extra resources.

The development of a more centralised approach to managing its debts will also help ensure that Dubai avoids making the same mistakes again. In the past, it was so decentralised that just tracking down the hundreds of different legal entities underneath Dubai World and the debts associated with them took months.

For Dubai, the worst may be over in terms of shocks to the financial system, but there is still plenty of work ahead over the next few years before it can truly claim to have got over the debt burden of the past.