Lingering concerns over Dubai’s debts

Dubai has proven fairly adept at managing its debt, and greatly reduced the risk of another crisis. But low oil prices and the possibility the emirate has miscalculated the success of Expo 2020 and other planned tourist attractions remain factors to watch. Published in Gulf States News, 5 March 2015

The restructuring of $14.6bn of Dubai World debts in February may have given the impression that the emirate is handling its debt burden fairly well these days. But some five-and-a-half years after Dubai had to go cap in hand to richer neighbour Abu Dhabi, the emirate is still not completely out of the woods. A mountain of debt still needs to be paid off, and there are some concerns Dubai could hit problems further down the road, particularly if oil prices stay low.

As of April 2014, Dubai had debts of some $141.7bn, equivalent to 141% of its GDP, according to the International Monetary Fund (IMF). That figure includes money owed by the government directly as well as the loans and bonds of government-related entities (GREs), which are often collectively known as ‘Dubai Inc.’. As well as Dubai World, this group include the likes of Dubai Holding and the Investment Corporation of Dubai.

Some debt has been paid off since the IMF made its calculations. In 2014, Nakheel repaid Dh7.9bn ($2.2bn), and the recent Dubai World deal included the repayment of $2.96bn that was due in 2015, along with an extension for $11.7bn that was due in 2018 but now won’t have to be repaid until 2022.

Such arrangements mean the total amount of Dubai debt has fallen, but it remains substantial, and the fall in oil prices since last summer has revived concerns about Dubai’s ability to repay all of it in a timely manner. Although the emirate is not an oil producer of any note, its economy depends to a large extent on providing services to the other Gulf countries which do depend on hydrocarbons. If low oil prices persist, then Dubai could be hit indirectly.

“The [Nakheel and Dubai World] deals along with a few others have greatly reduced the risk of a debt crisis in the next few years at least. It has made the debt servicing burden a lot easier,” said Jason Tuvey, Middle East economist at Londonbased Capital Economics. But he added: “Dubai’s debt problems aren’t over just yet. If oil prices stay low for a long period, this could easily lead to problems further down the line when it comes to actually repaying the debts.”

More debts to come?

For now, most observers appear fairly sanguine. Moody’s Investors Service reclassified Dubai World debt from ‘impaired’ to ‘performing’ as a result of the restructuring. That, in turn, has improved the outlook for the local banking sector, which now has lower levels of non-performing loans to deal with. “Although the recent oil price collapse has increased the downside risks of the regional operating environment for the

UAE’s local banks, this more sustainable resolution of the [Gulf Co-operation Council] GCC’s largest legacy default reduces one of the key uncertainties facing the UAE banking system,” senior credit officer at Moody’s Khalid Howladar said.

However, the problem is not just Dubai’s existing debts, but also its propensity to incur more. The emirate is expected to spend more than $18bn on preparing for the Expo 2020 fair, according to HSBC. Of that, $8bn is expected to be incurred by the government and $10bn by GREs and the rest of the private sector. As the IMF noted in a review of the UAE economy in 2014: “GREs bear large-scale financial risks related to the implementation of these projects, and… this could undermine the deleveraging of GREs and, ultimately, their financial health.”

The Dubai Expo Committee estimates that 25m people will attend the Expo – whose latter stages will coincide with the UAE’s golden jubilee – over the course of six months. Those are big numbers and would mean that more people visit Dubai in that period than visit some far more established destinations elsewhere in the world. “Dubai is quite optimistic on the legacy of the World Expo and it expects visitor numbers to Dubai during the Expo and after to be greater than to London and Paris,” Tuvey said. “If the actual visitor numbers don’t meet expectations, they could face some problems. That is one of the key risks going forward.”

Confidence that the emirate can steer a safe course over the next few years has been helped by the general health of the economy. Fears of another damaging round of property boom and bust have receded after rental and sales prices softened in the second half of 2014.

Local estate agents say that was due to a mix of factors, including tighter mortgage rules, higher transaction fees, and buyers becoming more cautious because of lower oil prices. At the same time, the purchasing manager index for the UAE, which measures demand in the non-oil economy, remains at a high level.

Deputy director for the Middle East at the Institute of International Finance Garbis Iradian said the latter factor highlighted the resilience of the UAE’s non-oil sector. “I think Dubai’s growth will remain strong,” he said. “I am not concerned about the GREs. Most of them will continue performing well and will be able to service their debt.”

But in other parts of the market, there are signs of overbuilding. In the tourism sector, for example, there are plans for more than a dozen theme parks in the UAE, most of them in Dubai. That suggests that some investors, at least, are suffering from a touch of irrational over-exuberance. “We question whether that market can support the introduction of all the parks. I don’t know which ones will not open, but it would be my guess that some will not,” said Dennis Spiegel, president of International Theme Park Services, which provides consultancy for theme park operators.

For now no one is predicting another debt crisis, and while some agree that the emirate’s debt burden is an issue, they say it is one the authorities can deal with. “If you have $120bn of debt, it is a problem for any nation the size of Dubai,” head of research at Egyptian investment bank EFG Hermes Wael Ziada said. “But it is manageable.” The problem for Dubai is that at least some of the factors that will determine whether it can repay its debts on time remain outside its control, not least the direction that oil prices take.