Clarification on Dubai’s current credit situation and restructuring plan could help mitigate further negative impact on the UAE’s fiscal performance and eventually restore investor confidence, says a recent report by private shareholding firm Daman Investments.
Since Dubai World requested on November 25, 2009 a standstill on more than $26 billion (Dh95.4bn) of loans linked to its property units Nakheel and Limitless, varying estimates on the emirate’s outstanding financial obligations across its conglomerates have surfaced in the media – resulting to market confusion.
The International Monetary Fund (IMF) has placed Dubai government-related firms’ outstanding total debt at $109bn, but other sources have pegged the emirate’s credit situation to be worth between $85bn and $160bn.
The Abu Dhabi-based
Daman Investments believes that there should be greater transparency in disclosing the measures that Dubai will take to repay its debt.
“Investors need clarity on Dubai debt repayment plans whatever it ends up looking like. That will be a defining moment for the UAE economy as a whole. The inability thus far to reach this milestone has deepened the ‘bad credit’ profile of the UAE, and has stifled economic activity and growth prospects for the country as a whole, in many cases without justification,” the report mentioned.
The Dubai debt issue and the lacklustre property sector have weighed heavily on the economic outlook for the UAE. In its
World Economic Outlook report published in April, the
IMF has forecasted the Emirates’ real GDP in 2010 to be a measly 1.3 per cent, but this figure is projected to more than double to 3.1 per cent in 2011.
IMF expects UAE’s economic growth to be the slowest in the GCC region with Qatar offering a massive contrast by being bullish with a real GDP projection of 18.5 per cent in 2010 and 14.3 per cent in 2011. The economies of Saudi Arabia and Kuwait are seen trailing behind with an outlook of 3.7 per cent and 3.1 per cent, respectively in 2010 and four per cent and 4.8 per cent the following year.
The IMF, however, cautioned about the uncertainty of their outlook for the Gulf region due to two major risks: one is that slower-than-expected recovery in advanced economies could dampen commodity prices and tourism; and the other is the risks associated with the aftermath of the Dubai World debt crisis.
“In particular, a possible repricing of quasi sovereign debt could have a lasting effect on financial systems, corporate sectors, and, more generally, economic activity in the area,” the IMF said.
Dissecting Dubai’s credit woes
Quoting estimates by IMF, Daman Investments presented a breakdown of Dubai debts spread across the Dubai Inc – a term used to describe the network of Dubai government-owned companies.
According to the report, Dubai World has a total debt of $26bn, Dubai Holding has $15bn, Investment Corporation of Dubai has $20bn, the Government of Dubai has $24bn and other jointly owned entities also have $24bn.
“At the end of May 2010, Dubai World announced its final debt restructuring for the remaining $14.4bn of debt, the terms of which have been accepted by the seven main creditor banks and the remaining 70 were given the same terms at an informal presentation in July and Dubai World is confident that they will complete the restructuring in the coming months,” the report mentioned.
International media this month have reported that
Dubai World plans to sell its prized assets such as stakes in the luxury retailer Barney’s of New York, Atlantis Hotel in Dubai and MGM Resorts in Las Vegas over a period of eight years to raise $19.4bn to pay off creditors.
Nakheel was also reported to be eyeing the sale of bonds by the end of 2010 to raise enough cash to repay 60 per cent of its outstanding debt.
However, Daman believes that Dubai’s economy – the most diversified in the Gulf region – could offer some level of reprieve as the emirate struggles to meet its financial obligations.
“There is no individual sector that accounts for the [lion’] share of the [Dubai] economy. However, if we delve deeper we find that real estate and the related construction sector account for circa 13 per cent, both of which remain mired in the midst of a severe correction. Hence, the question one has to ask is can the rest of the sectors compensate for the drag created by the above mentioned sectors,” the report noted.
Property market under pressure until 2011
Daman Investments expects Dubai’s real estate market “to remain in a quagmire” until the end of 2011 due mainly to oversupply, which pulled property prices down to 2006 levels. Fingers have been pointing to the property bubble burst as one of the factors that contributed to the emirate’s current financial situation.
The report mentioned that there is an immediate glut in the Dubai office space with an extra 12 million square feet scheduled to be released between 2011 and 2012. Vacancy rates stand at a significant 38 per cent and may likely exceed 50 per cent in the next coming years as new supplies enter the market. Office rents have also declined by about 45-60 per cent since the peak period of 2008.
The same scenario is seen in the residential property sector as 26,000 units are expected to enter the market this year and another 25,000 in 2011. Apartment rents have decreased at an annual rate of 10 per cent while villa rents dropped 23 per cent annually.
“In essence the real estate sector is in a transformative phase as it shifts from a period of asset and value creation to that of asset management and value enhancement. A lone bright spark as a result of the supply is the fact that the inflation outlook remains sanguine,” Daman said.
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