Abu Dhabi recovery remains on track despite Dubai's problems

BEIRUT: In its first report on the impact of the Dubai debt crisis on the United Arab Emirates (UAE) and the region, the Institute of International Finance projected economic activity in the UAE to contract by 1.6 percent in 2009 and to grow by 3 percent in 2010, adding that the country’s recovery remains on track despite Dubai’s debt problems, as reported by the Country Risk Weekly Bulletin. 

It projected non-oil growth at 0.5 percent in 2009, with Dubai’s non-oil sector contracting by 5 percent compared to average non-oil growth of 12 percent in 2003-08, and Abu Dhabi’s non-oil sector growing by 3 percent this year, 

 It further expected non-oil growth to rebound to 3 percent in 2010, with Abu Dhabi seeing growth of 4 percent and Dubai’s non-oil economy posting a 1.5 percent growth rate.

It said Dubai relied heavily on leverage and debt in its rush to build a leading business hub in the region, adding that a correction was imminent after the rapid growth of the past few years, even in the absence of the global financial crisis and the recession in 2009. 

It noted that Dubai’s economy expanded at double-digit rates, with much of this growth financed by debt that reached an estimated $80 billion, equivalent to about 123 percent of its GDP and around half of the total external debt of the UAE. As a result, Dubai’s debt service due in 2009 stands at 29 percent of GDP, one of the highest among emerging economies. 

The IIF considered that the current restructuring of Dubai World is not likely to have a material effect on Abu Dhabi, which accounts for 55 percent of the UAE’s economy due to the strength of oil revenues. It estimated the UAE’s total government foreign assets at around $460 billion, including foreign assets of Abu Dhabi’s sovereign wealth fund ADIA, the central bank, the Abu Dhabi Investment Council, and the International Petroleum Investment Company. 

The IIF expected the recent events in Dubai, including the request for debt restructuring, to have a potentially adverse impact on private capital flows to the region, as financial institutions are likely to reconsider credit terms to Dubai’s Government-related Entities and to other public sector affiliated entities in the region. 

It said potential growth in the UAE will be affected by the departure of expatriates from Dubai, who account for more than 80 percent of the labor force, and who have been the driver of the surging demand for housing and real estate. It considered that the direct impact of DW debt restructuring, in terms of potential write-downs for DW creditors, will be limited and manageable. 

It warned, however, that Dubai World’s request for a standstill and the way its debt restructuring is handled in the weeks ahead could have wider implications for financial markets, including a decline in the flow of credit and a rise in the cost of borrowing, therefore hindering the speed of recovery. 

Inparallel, Merrill Lynch indicated that, compared to the $59 billion of liabilities of Dubai World, the announced restructuring of $26 billion might ease some market concerns regarding the risk of an outright Dubai or Dubai World default. 

It added that the total losses under conservative restructuring scenarios seem to be relatively manageable for international investors, though it would shake their confidence. 

It noted, however, that a total debt restructuring of $26 billion amounts to almost 40 percent of Dubai’s GDP. It said that, while the focus is largely on the repayment of bonds and syndicated loans, Dubai World is going through a broader-based restructuring that may affect domestic liquidity and economic activity. 

It expected significant de-leveraging in the economy and a further damage in corporate balance sheets unless a well-designed federal support program is announced. It added that debt restructuring is likely to hit banks and real estate markets directly, which constitute 33 percent of GDP, and trade activity indirectly that accounts for 39 percent of GDP. 

As a result, the UAE is likely to face a slowdown in GDP growth. Merrill Lynch estimated that Dubai overall faces almost $50 billion in debt amortization in the coming three years, with $12bn due in 2010, $19bn in 2011 and $18bn in 2012. 

It considered that the restructuring is likely to make new issuances much harder for the UAE in the short term, as the implicit support of Abu Dhabi is no longer taken fro granted. – The Daily Star