Dubai’s Debt Wall Still Looming?

Dubai’s debt problems aren’t fully resolved despite growing optimism regarding the emirate’s economy.

At the turn of this century, Dubai had boomed, becoming the centre of business, banking and finance in the Middle East. A flood of inward capital allowed it to conspicuously demonstrate its wealth: palm-shaped islands, the world’s tallest skyscraper, and an indoor ski slope in the desert.

But the global financial crisis stalled this growth. In fact, the emirate called on its neighbour Abu Dhabi for $20 billion in emergency loans in order to avoid default. Subsequently, Dubai’s real estate market saw prices slash by half, sending many companies to bankruptcy.

Other companies, like investment firm Dubai Group, a subsidiary of state- owned Dubai Holding, and state-owned conglomerate Dubai World, were forced into restructuring billions of dollars in debt.

After 2011 the tide shifted. The Arab Spring had investors looking for a safe haven in which to park their funds.

Dubai provided the ideal setting. Hence, its property market started attracting buyers, which led to a partial recovery in the economy. The emirate, around the same time, also successfully managed to restructure tens of billions of dollars of its debt. The largest was the $25 billion loan restructuring of Dubai World. Over time this fuelled both consumer spending and investor confidence in Dubai.

The repayment of several debt issues last year abetted this. This took off with the maturity of $500 million owed by the Dubai Holding conglomerate. DIFC Investments, the investment arm of Dubai International Financial Centre, lined up new financing to meet its $1.25 billion repayment. Then there was the maturing of the $2 billion Islamic bond of Jebel Ali Free Zone, or Jafza, in November. The other big restructuring process approved was $2.2 billion of Dubai Drydocks.

The conclusion of the $10 billion restructuring of Dubai Group this May, which was the last big remaining debt restructuring by local entities in Dubai, also helped remove substantial uncertainty in the market.

With this partial revitalisation, Dubai in 2013 seems poised to lift and take-off to its pre-2009 highs. But there’s a caveat: its debt. There are still lingering concerns about the emirate’s ability to repay and refinance debt obligations in the long term.

Standard Chartered bank estimates that Dubai and its government-related entities (GREs) – companies and agencies backed by the state – have around $48 billion of debt obligations coming due between 2014 and 2016.

According to a report from the Institute of International Finance, a global financial services industry body, Dubai needs $10 billion in 2013 and $27 billion in 2014 to deal with the maturing debt. The IIF also urged Dubai to continue improving the balance sheets of government-related entities.

The debt obligations of several state-linked companies have been pushed into the future. Thus many of these debts are now due between 2013 and 2016.

The worry is that the emirate has not yet outlined clearly how it will raise all of the money. Moody’s has also recently raised concerns over the execution risk on three large approaching bond maturities amid restructuring talks with bank lenders at state-linked entities. After Dubai Electricity & Water Authority (DEWA), the state-owned utility company, raised $1 billion to pay its debt that was due this year, Moody’s pointed out that more companies are expected to extend maturities on debt, diversify and seek medium-term refinancing.

Since there have been no significant asset sales to reduce the debt burden, despite measures to bring this into conceptualisation, high demands are being placed on the state’s depleted funds. Since most of these funds are increasingly earmarked to help repay bonds, the government is also negotiating with banks in the restructuring of state-related entities’ debt.

According to MEED, a distinction has emerged in the risk perception of different entities in Dubai. Companies with good performances like Jumeirah Group, Emirates and DP World are able to borrow at cheap rates. But cash-strapped entities, such as Dubai Holding, are finding it tougher to avail good terms for loans out of banks. To circumvent this problem, Dubai is now pushing its borrowing away from holding companies and into where the assets and cash flows are.

This explains why Jumeirah Group, which – due to its low debt and good cash flows – would get a better deal than its parent company Dubai Holding, borrowed $1.4 billion to repay around $1 billion of outstanding bonds at Dubai Holding. The deal suggests that rather than give up long-term control of its best assets by floating them on the stock market, Dubai may simply mortgage them to pay off the debts elsewhere.

This strategy will help shift debt away from entities that will struggle to repay it, and will probably help in the short- term. But it shifts the debt burden onto entities that were not responsible for it, which could limit their ability to generate much needed growth in the future.

London-based research consultancy firm Capital Economics has warned that, “Over the medium term, the scale of the liabilities accumulated in the boom years means that Dubai’s debts are likely to cast a cloud on the horizon, leading to periodic bouts of market volatility.”

The IMF has warned that Dubai is risking another boom-to-bust business cycle by pushing up its debt to boost short-term growth at the cost of the medium-term outlook, in a statement concluding its annual mission to the UAE.

The global central bank highlighted an increase in debt at Dubai government- related companies from $84 to $93 billion in the year to end of March. Borrowers have been taking advantage of the low yield on Dubai Government bonds to raise new funds. Total debts of $142 billion are now over 100 per cent of GDP, the IMF warned.

Yet Masood Ahmed, director of the IMF’s Middle East and Central Asia department, said that, “The IMF is not worried about Dubai’s ability to meet its upcoming debt obligations.”

While this optimism is not unfounded, it also does not mark the end of all of Dubai’s debt woes.