The government of Dubai’s outstanding direct debt is currently put at $31.4 billion equivalent to 38 percent of the GDP (gross domestic product). Over half of this ($18.5 billion) is debt taken on to finance the Dubai Financial Support Fund (DFSF) which has used the money to provide finance to Dubai’s struggling government enterprises (GREs), specifically Dubai World & Nakheel. In theory these GRE’s have until 2014 to repay the DFSF through asset sales and their own revenues. This should allow the government to meet the $20 billion spike in debt repayments in 2014 when its borrowings to fund the DFSF mature, according to Samba Financial Group’s Dubai Government Debt Update Note issued on Monday.
Another $6 billion of the outstanding total represents holding company level debt of the Investment Corporation of Dubai (ICD) (i.e. this excludes borrowings by any of ICD’s subsidiaries or other group companies currently estimated at around $12 billion). Of the $6 billion owed by the government, $4 billion was due this year, the Samba report said. However, agreement has just been reached to refinance $2.8 billion over 5 years, with ICD repaying the remaining $1.2 billion. The original loan was taken out in the summer of 2008 and had been earmarked for acquisitions, but instead has been drawn down to provide emergency liquidity to the government as the financial crisis struck.
The government of Dubai also has direct contingent liabilities estimated at $7.6 billion related to guarantees for DEWA ($3.6 billion) and RTA ($1.8billion), as well as $2.2 billion under a shortfall guarantee relating to the restructuring of DW. Including these guarantees, Dubai government debt is higher at $39 billion equivalent to more than 47 percent of GDP, although the expectation is that the government will not need to cover these contingencies, the report added.
The government’s current debt level appears manageable with respect to traditional indicators of debt to GDP, and the sovereign should be a solid credit risk.
However, the debt repayment burden is large given the government’s limited fiscal revenues of around $8 billion a year, and that the budget is running a deficit of $1-1.6 billion a year. Interest payments have risen from zero in 2007 to $2.4 billion in 2010 according to IMF data.
It is thus critical that the government continues to have access to capital markets at reasonable rates and takes measures to strengthen its fiscal accounts. In addition, improvements in GRE finances will be key to the long-term financial health of the emirate, and their repayment of the DFSF as planned is necessary to avoid the otherwise unaffordable spike in government repayments in 2014. However, it seems more likely that the government will extend repayments due and seek to roll over the $10 billion notes held by the central bank, and possibly the financing from Abu Dhabi via its banks.
The Samba report said Dubai government has limited revenue raising options. The bulk of its revenues come from a range of fees, revenues from oil and gas operations, and income from investments made by the Dubai government. Tax revenues are almost entirely from customs charges as Dubai does not levy any income tax on individuals or businesses, except a 20 percent tax on profits earned by foreign banks operating in Dubai.
With no new taxes expected, Dubai will be limited to raising various fees it charges, although to-date it has been reluctant to do so. The main fee revenues come from land transfer and mortgage registration fees, immigration and visa related fees, tourism related fees (including hotel taxes), aviation related fees and other transport related fees.
While debt restructuring has been completed for DW, other GREs have also entered into restructuring negotiations and there remains a risk that the Dubai government will be pushed into absorbing further contingent liabilities. While noting that GRE debts are not its direct obligations, the government has indicated that it “may at its sole discretion decide to extend such support as it may deem suitable, and based on such terms as it may deem suitable, to any such entities to allow them to meet their debt obligations.”
The government does not publish any official estimates of outstanding GRE indebtedness, making assessments of default/restructuring risk difficult, although GRE large exposure to the weak real estate market is not encouraging. In fact, the IMF suggests that most GREs operating in the real estate sector should be seen as sources of sovereign risk. The IMF also estimates that Dubai’s GRE’s need to make repayments of $24 billion during 2011-12, out of a daunting total of $31.2 billion for Dubai Inc. as a whole. Total Dubai Inc. debt is estimated at $113 billion, equivalent to over 130 percent of Dubai’s GDP. Of this, GREs account for around $77 billion (90 percent of GDP), the report added.
Confidence is improving in Dubai as its traditional nonoil sectors have begun to pick up steam, while restructuring and refinancing agreements are providing the emirate with more time to sort out its finances. Real GDP data through 2010 show that trade, transport, communications, hotels and restaurants all performed well, and available data show this trend continuing into 2011. Real GDP grew by 2.4 percent in 2010 and is likely to hit around 3.5 percent this year, the Samba report said.
In addition, the struggling real estate sector has recently received a boost from the UAE federal government’s decision to extend visas for real estate investors from six months to three years. Long-term residency visas will improve the attractiveness of second home purchases in Dubai and should help raise demand, including from those looking for a safe haven from recent regional unrest. While this development may help stabilize the market, prices are still likely to remain weak as a large amount of new supply is scheduled to be delivered over the next 24 months.
At the same time markets appear willing to provide finance to Dubai as evidenced by the latest successful $500 million government bond issue (10-year with a 5-year put option at 5.59 percent) under its expanded Euro MTNP, the proceeds of which are earmarked for construction spending and budget finance. Dubai sovereign CDS spreads and bond yields have been falling in recent months, suggesting that investors are confident that the government will have the means and willingness to make repayment of its direct debts a priority.
The Samba report said despite the improving economic climate in Dubai and increasing oil revenues in Abu Dhabi, Dubai Inc.’s debt overhang remains large, and risks are skewed to the downside. The total repayment burden in 2011 and 2012 is equivalent to around 20 percent of GDP in each year. Meeting these obligations will continue to require a mix of restructuring, refinancing, asset sales, new funding and an improvement in GRE revenues.