Dubai sovereign debt pushed up to $54.8bn but ‘stabilising’

The Dubai government’s recent sukuk sale has pushed up sovereign debt to US$54.8 billion but general indebtedness is “stabilising”, says Bank of America Merrill Lynch.

The Department of Finance last week issued a $750 million, 15-year sukuk priced at 5 per cent, the first bond sale by the emirate in more than a year.

BAML said the proceeds would be used to help repay a $1.9bn sukuk due in November.

“Dubai sovereign debt appears to be stabilising, in line with our view that the growth recovery would ease deleveraging trends at the sovereign level,” wrote Jean-Michel Saliba, a BAML economist and author of the research note, released yesterday.

“This is, however, accompanied by a concurrent shift towards less transparent domestic borrowing.”

Dubai was given a boost last month when the Abu Dhabi Government and the Central Bank agreed to roll over until 2018 $20bn of debt extended to the emirate during the depths of the 2009 financial crisis.

The debt challenge facing Dubai and its stable of companies has already been softened by a lowering of borrowing costs and a steady uptick in the economy in the past year. Dubai Electricity and Water Authority, the Roads and Transport Authority and Dubai Ports Customs and Free Zone Corporation all paid back debt repayments early. As a result, direct sovereign guarantees had been pared down to $5.9bn – or 6 per cent of GDP, from $7.8bn – or 8.5 per cent of GDP a year ago, according to BAML.

Dubai government debt stood at $54.8bn (55.9 per cent of GDP), compared to $50.5bn (55.5 per cent of GDP) a year earlier, estimated BAML. It said the government’s indebtedness had fallen by 1.5 percentage points over the same period, if a $24.8bn loan from Emirates NBD was excluded from the calculation.

But the bank warned of risks stemming from the growing tendency to rely more on local borrowing. In addition to the Emirates NBD loan, most of the buyers for the $750m sukuk were from the region, it said. The shift signalled less transparency on sources and use of proceeds, it warned.

In a sign of returning investor appetite in Dubai, the emirate’s credit risk dropped to 165 basis points on April 4, the lowest level since 2008, before the emirate become entangled in a debt crisis. The 15-year tenor on the sukuk sale has helped to ease a crowded debt maturity schedule in the coming years.

“We’ve been expecting Dubai to come to market since the turn of the year, and with a packed public debt repayment schedule of $22.6bn over the next 10 years and World Expo 2020 to finance, an issue down the longer end was no surprise,” said Danny Reynolds, an associate director at Exotix Partners, the investment bank, in Dubai.

Authorities in Dubai will invest Dh30bn in new infrastructure in preparation for Expo 2020, Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Expo 2020 Preparatory Committee, said before Dubai won the right to host the event in November. But Deutsche Bank has estimated the total cost of infrastructure projects was likely to reach $43bn.

“The bulk of the Expo 2020-related capex [capital expenditure] is set to take place in 2016-20,” Mr Saliba wrote. “Fiscal room to accommodate the additional spending without jeopardising debt dynamics could have sensibly increased by that time, if the Dubai Government remains prudent.”

tarnold@thenational.ae

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