Ras al-Khaimah has clearly been watching neighbouring emirate Dubai and its attempts to get on top of its $110bn debt pile.

“The challenge for Ras al-Khaimah will be its new bond issue going smoothly”

Dubai sent shockwaves around the world when it announced that Dubai World would restructure some $25bn of debt in November 2009, and although it has succeeded in quickly reaching a deal with its creditors and borrowing again, its reputation has taken a battering.

Part of Dubai’s problem was a lack of communication, and the sense that decisions were often being made at the last possible moment.

Ras al-Khaimah has taken a more proactive approach and is restructuring its debts well in advance of their maturity. Ratings agencies expect the government to pay down debt and reduce the debt to gross domestic product ratio to about 30 per cent.

The recent launch of an offer to buy back some outstanding debt due in 2012 and 2013 and issue a new longer-dated bond also forms part of the emirate’s strategy to consolidate its borrowing under a single company. This will make its overall debt level far more transparent than its neighbours, who often borrow through a web of state-owned companies with varying degrees of government backing. It should also help the emirate lower its borrowing costs.

So far, investors have welcomed Ras al-Khaimah’s move, especially as European debt worries have sparked a sell-off in the bond markets, making some investors happy to have the chance to take their money off the table.

The challenge for Ras al-Khaimah will be its new bond issue going smoothly. This will be a sign of confidence from international investors in the emirate’s plans. Fitch Ratings estimates that the emirate will grow by 4.3 per cent this year, compared to 3.5 per cent in 2009.

With the emirate no longer benefiting from Dubai’s boom, it will need to forge its own plans to ensure it meets those growth projections, and can repay those pushed out bond debts.