Hope and fear over Dubai debt

More buoyant stock, bonds markets help refinance obligations but uncertainties on debt situation remain.

DP World’s renewed interest in international capital markets is a positive sign for Dubai Inc.

DP World's reawakened interest in the international capital markets signals another step in the recovery of Dubai Inc, but the emirate still faces uncertainties over how it will refinance a significant amount of debt coming due over the next two years.

Dubai's debt situation has been under the microscope since Dubai World, one of the emirate's biggest conglomerates, sought a standstill on debt repayments almost a year ago. Initial fears of a sovereign default proved unfounded, and the ensuing European debt crisis soon stole the spotlight.

But Dubai has remained under scrutiny because of the sheer size of its total debt, estimated at US$109 billion (Dh400.3bn) by the IMF in February.

Dubai World's $24.9bn debt restructuring agreement last month marked a milestone in the emirate's attempt to solve its debt problems. The deal was made possible in part by $10bn in funding from the Abu Dhabi Government and another $10bn from the Central Bank.

The Institute of International Finance (IIF) estimates that Dubai faces repayment on $42.3bn of debt next year and in 2012. While further restructuring of debt through negotiations with creditors could go some way towards averting a liquidity crisis, analysts say further transfers from the Federal Government or from Abu Dhabi to Dubai cannot be ruled out.

"Dubai has more difficulties with the debt overhang and they need further support from Abu Dhabi, as it holds the foreign assets," said Garbis Iradian, the IIF deputy director for Africa and the Middle East.

The IIF said in its semi-annual report on the Gulf economies: "Abu Dhabi's assistance is likely to remain selective and conditional."

The IIF is a Washington-based think tank funded by global financial services companies, including 60 institutions based in the GCC.

John Sfakianakis, the chief economist at Banque Saudi Fransi in Saudi Arabia, said Dubai's need for further government support was unclear.

As a first step, Mr Sfakianakis said, the emirate should put a number on its overall debts to calm speculation over its ability to pay. That, he said, would give renewed confidence to investors and help economists and analysts gauge the real need for support.

"The authorities have to understand that they have to put an end to all this debate and speculation," Mr Sfakianakis said. "Even if the number is high, a lot of people will acknowledge they have taken a step toward transparency."

Dubai revealed $28.7bn of debt in a prospectus for a government bond issued in September. But that figure included only direct government debt and debts of the Investment Corporation of Dubai, a holding company that owns Emirates Airline and Emirates NBD among other assets. Much of the concern about Dubai's debt involves the borrowings of government-linked companies not included in its official finances.

But Mr Iradian and other economists say things are looking better. Dubai World's restructuring is almost behind it after all of the conglomerate's bank creditors assented to the plan last month. And international investors are searching for good returns in frontier markets such as the UAE.

Investor sentiment in the UAE improved by 12.5 per cent in the third quarter of the year compared with the second quarter, according to a recent survey by Shuaa Capital, an investment bank based in Dubai. That beat an 8.1 per cent rise in sentiment for the whole region.

The Dubai Government and Dubai companies have taken advantage of more buoyant markets to refinance debt and fund their growth with new bonds.

Dubai issued a $1.25bn bond at the end of September that drew strong interest from international investors. Emaar Properties and the Dubai Electricity and Water Authority followed with their own bonds as markets for debt and stocks recovered. The Dubai Financial Market General Index has risen by 18.6 per cent since August 15.

But fears remain that the improved climate for fund-raising will not be enough to tide Dubai over without further assistance. And with debt obligations next year and in 2012 equal to 28 per cent of Dubai's GDP, the IIF says other government-related entities will probably seek to restructure their debt. Dubai Holding will need restructuring unless it is able to sell some of its assets at market prices, said Mr Iradian.

The conglomerate has $4bn in debt due by 2012, the IIF says, while Dubai World has a further $13.1bn in debt due over the same period. Investment Corporation of Dubai has $11.5bn in debt obligations next year and in 2012.

Other corporations have $13.7bn in debt. The emirate's total debt obligations are estimated by the IIF at $112.3bn, or 140 per cent of its GDP.