Dubai may use a wide range of strategies, from asset sales to increased bond issues and continued support from Abu Dhabi, to get through a looming period of debt repayments – but it may cause its bankers a few sleepless nights on the way.
The emirate survived its 2009 debt crisis largely by restructuring obligations of state-linked firms, pushing them several years into the future. Many of those obligations will come due between 2014 and 2016, saddling Dubai with tens of billions of dollars of payments.
Statements by government officials in recent weeks suggest Dubai is assembling a mix of steps to handle the approaching debt hump, addressing the problem from many angles. Strong bond and equity prices show investors think these steps will succeed.
But the emirate has still not explained clearly how it will find all the money it needs – and in particular, how state-owned investment firm Dubai World will meet its debts.
“Little progress has been made on clarifying and strengthening the legal framework for insolvencies/debt restructuring, while details of the Dubai government’s capacity to support its government-related institutions remain uncertain,” credit rating agency Moody’s Investors Service said in a March report.
This worries the banking community, said a senior Dubai-based banker from an institution owed money by Dubai World.
“I’m on the pessimistic side as I see Dubai doing very well in everyday life – at the airport, tourism numbers up, real estate prices going up – but I’ve still not seen anything on Dubai World,” he said, declining to be named because of the commercial sensitivity of his remarks.
“There is still time to go but we don’t hear anything. It’s worrying.”
Standard Chartered bank estimates 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.
Although Dubai has recovered strongly from the crisis, economic growth alone will not provide nearly enough money to repay those debts, and the emirate appears to have little room to boost its cashflow.
The emirate’s government is running a small budget deficit and while Dubai receives dividends from profitable state-owned firms, the numbers aren’t huge; Emirates airline and the Dubai Electricity and Water Authority each paid 500 million dirhams ($136 million) of dividends last financial year.
Funds from its road toll system and receipts from its hugely profitable duty free operations have already been securitised.
Raising any large amount of money from new taxes or fees, or higher rates for existing taxes, is not on the cards since it could hurt Dubai’s competitiveness in a region where taxes are very low, officials have said privately.
The first big payment coming due is money lent to Dubai during the crisis by a deep-pocketed neighbour. The Dubai Financial Support Fund (DFSF) borrowed a total of $20 billion from Abu Dhabi and the federal government of the United Arab Emirates: $10 billion from the UAE central bank and $5 billion each from two state-owned banks in Abu Dhabi, National Bank of Abu Dhabi and Al Hilal Bank.
This five-year debt will come due in November 2014. Since the DFSF lent essentially all of the money on to needy Dubai GREs, it is unlikely to be able to repay all of the debt next year, or even a large part of it.
For example, the DFSF is one of the main creditors to Amlak Finance, a troubled Islamic real estate lender which is still trying to renegotiate $1.9 billion of debt with local and foreign banks before resuming operations.
Most commercial bankers assume the Abu Dhabi debt will not be a problem. They note Abu Dhabi still has an interest in preserving Dubai’s financial stability, and expect all or most of the $20 billion liability to be rolled over quietly for a further several years by the Abu Dhabi government and banks.