Debt levels set to rise again in Dubai

Published in MEED, 29 October 2017

The 2009 bailout of Dubai by neighbouring Abu Dhabi might seem a long time in the past, but issues around the debts of some government-related entities (GREs) continue to cast a shadow on aspects of the business world in the emirate.

One recent example was the announcement on 18 September by ports operator DP World that it was to buy Drydocks World and Maritime World for $225m and $180m respectively. Like DP World, the two companies are subsidiaries of state-owned conglomerate Dubai World, so in a sense it is merely a reorganisation rather than a change in ownership. But the deal for Drydocks World is also interwoven with debts that date back to the pre-crisis period. DP World says the transaction depends on a successful restructuring of $2.1bn of Drydocks World’s debt, which analysts have said will see liabilities to creditors reduced to $638m.

“We understand Drydocks is a commercially viable business, but one that has been burdened by legacy debt raised during its foray into international markets in 2007,” says Rehan Akbar, a senior analyst at US ratings agency Moody’s Investors Service, referring to a series of acquisitions made by the firm in Indonesia and Singapore a decade ago.

It is a useful reminder that, while debt can be accumulated quickly, its effects can last a long time. Dubai’s debt pile has see-sawed up and down over the years. According to Moody’s, the emirate’s total public debt, including that held by GREs, rose from 113 per cent of GDP in 2010 to 128.7 per cent of GDP in 2015. It has since fallen back, with the IMF calculating that the overall amount owed by the government and GREs as of 2017 was $119bn, equivalent to 111.5 per cent of Dubai’s GDP.

This debt pile comprises several different instruments. As of the start of this year, the Dubai government had $26bn of outstanding bonds and a further $1.1bn in loans. The majority of the $27.1bn total is due to be paid back by the end of 2022. The government has a further $32.9bn in domestic loans, which has no allocated maturity date.

The debts accumulated by GREs that are majority owned by the government are greater still, and add up to almost $59bn. That includes $23.9bn in bonds and $35bn in loans. As with the sovereign debt, most of it – $43.4bn – is due to be repaid between 2017 and 2022. Over this period, two years in particular stand out for the amount due to be repaid or refinanced: in 2018, a total of $27.2bn falls due, while a further $15.5bn is due to be settled in 2022.

There are other liabilities that are, at least partly, the responsibility of the government, including $17.1bn in restructured debt, most of which is not due to be repaid until after 2022, as well as $5.4bn of debts from GREs in which the emirate has a minority stake and $4.1bn in government guarantees. Lastly, there is also $16.7bn in bonds and loans owed by Dubai government-controlled banks.

Rather than having to repay these debts over the next few years, most of the IOUs are likely to be rolled over or otherwise replaced with new debt instruments and, as such, there is not much concern in the market about Dubai’s ability to handle its debts. Saudi bank Samba, for example, said earlier this year that it expects the spike in Dubai’s obligations in 2018, which largely represent earlier financial support from Abu Dhabi, to be rolled over once again.

“It’s always a refinancing game,” says another analyst. “Nobody is expecting them to repay. You’d expect them to refinance as and when maturities come due. With interest rates being so low, debt service is quite manageable.”

Even so, there are some indications the emirate’s debt pile will once again start to grow in the coming years. Rather than being representative of the wider market, the planned cut in the debt owed by Drydocks World as part of the takeover by DP World could be something of an outlier.

One factor is that GREs continue to issue more debt. For example, in July this year, Dubai Aerospace Enterprise – whose shareholders include the Investment Corporation of Dubai and other GREs – issued $2.3bn in senior unsecured notes, which are due to be repaid between 2020 and 2024.

Perhaps more significantly, the Dubai government is expected to record a budget deficit of AED2.5bn ($680m), equivalent to 0.6 per cent of the emirate’s GDP, this year. That is a significant shift from the balanced budgets it has produced in the preceding four years.

The boost to spending is in part to get the city ready for Expo 2020, but also includes other infrastructure schemes for transport and real estate projects. The balanced budgets since 2013 had enabled the government to reduce the sovereign debt pile from 33 per cent of GDP in 2010 to about 25 per cent of GDP by 2015. The switch from surpluses to deficits means the trend will now start to go into reverse. Moody’s says it expects Dubai’s debts to climb back to 30 per cent of GDP by 2018.

For now, however, the greatest sign of strain in the local market is not with sovereign bonds or GRE debts at all, but with smaller businesses and consumers.

Moody’s forecasts that problem loans across the UAE could rise to 6 per cent next year, up from 5.3 per cent in mid-2017, but the delinquency problem will be focused in just a few parts of the market.

Mik Kabeya, an analyst at Moody’s, predicts the loan performance of large corporate borrowers and GREs will remain resilient, but says the slow growth rate and the generally softer economy “is hitting small businesses and individuals disproportionately”. Even so, that situation can be partly traced back to problems in the state-owned sector, with the ability of consumers to service their loans being impaired by job losses, not least those at GREs.