Dubai’s debts still a major cause for concern - Capital Economics
Middle East & North Africa Economics

Dubai’s debts still a major cause for concern

Middle East Economics Update
Written by James Swanston

Fears over Dubai’s debts have re-emerged in recent weeks and, in this Update, we provide revised estimates of the Emirate’s debt pile. The short point is that the debts of Dubai’s government and of government-related entities remain large, and with the coronavirus outbreak exacerbating strains in key sectors, servicing these debts is likely to prove difficult and Abu Dhabi may need to offer financial support.

  • Fears over Dubai’s debts have re-emerged in recent weeks and, in this Update, we provide revised estimates of the Emirate’s debt pile. The short point is that the debts of Dubai’s government and of government-related entities remain large, and with the coronavirus outbreak exacerbating strains in key sectors, servicing these debts is likely to prove difficult and Abu Dhabi may need to offer financial support.
  • The spotlight has shone back onto the Dubai’s debts after the sovereign issued a $1.0bn sovereign dollar bond and an $1.0bn dollar sukuk last month. The accompanying prospectus stated the government was directly liable for $33.6bn (34% of GDP), which is a lot lower than we and ratings agencies had previously estimated. But, as we have argued before, the main problem lies with the debts of government-related entities (GREs, which were omitted from the prospectus).
  • In a Focus earlier this year, we constructed a database of the outstanding debts of Dubai’s GREs by maturity and instrument and we have updated this in Table 1. Since we published that piece in April, the overall debt burden of GREs has declined from our previous estimate of close to $90bn to around $76.0bn (equal to 77% of GDP). The reduction in debt primarily reflects Dubai World, one of the large holding companies, which made a final payment in July of a $11.0bn loan taken after the 2009 debt crisis.
  • That said, the debt problem in the Emirate still looks to be acute – before the end of 2024, more than $40bn (41% of GDP) of debt is coming due. (See Chart 1.) 2023 appears to be a crunch point. While the debt of Dubai World has declined, the debt of Investment Corporation of Dubai (ICD) has risen by $1bn since April and now accounts for just under half of all GRE debt. (See Chart 2.) This appears to be due to the ownership of some GREs, including the Dubai World Trade Centre Authority, being transferred to ICD
  • The coronavirus crisis has merely exacerbated long-standing problems of overcapacity in some of Dubai’s key sectors. As we have highlighted before, the sectoral composition of Dubai’s economy makes it the most vulnerable in the region to social distancing measures. (See here.) Occupancy rates in Dubai’s hotels had steadily fallen from 83% in 2014 to 78% last year, but the latest figures show that it was as low as 24% in June this year. Meanwhile, residential real estate prices have fallen even further this year and are now over 30% below their 2014 peaks.
  • There are already clear signs that this is severely hurting firms that operate in these sectors. Nakheel, one of the largest property developers and the GRE at the centre of the 2009 debt crisis, is reportedly seeking to refinance its debt. And last month, Arabtec, the largest construction firm in the region, has filed for insolvency. (Arabtec is not formally classed as a GRE, but it is partly owned by Abu Dhabi’s sovereign wealth fund, Mubadala.) (See here.)
  • Survey evidence suggests that other firms are also struggling to survive – Dubai’s Chamber of Commerce published a survey in May that suggested that 70% of all firms could go out of business by the end of the year. For travel and tourism firms, the problem is even more acute, with as much as 90% saying they could be closed by the end of the year.
  • If GRE debt problems do escalate, the Dubai government might be able to help. At face value, its reported debt ratio of 34% of GDP is low. But there are concerns that the government has omitted its loans received from commercial banks, which would make the debt load much larger. So there is a good chance that, as happened in 2009, Abu Dhabi is required to step in with financial assistance to Dubai. There were reports in May that Mubadala, Abu Dhabi’s sovereign wealth fund, would offer to purchase assets in Dubai.
  • However, Abu Dhabi may be hesitant to provide assistance. As the oil hub of the UAE, Abu Dhabi’s government is suffering more from low oil prices, which may limit the funds it is willing to provide in support. Additionally, the authorities may have concerns over moral hazard. Dubai GREs have failed to address their large debt burden possibly in the belief that, if they did run into trouble, Abu Dhabi would come to the rescue once again – another bailout would simply reinforce this view.
  • The upshot is that policymakers in Abu Dhabi may dither and the experience from the 2009 debt crisis is that, until any support from Abu Dhabi or the UAE central bank is made explicit, the uncertainty over GREs’ ability to service their debts will weigh on local financial markets and the economy.

Chart 1: Dubai GRE Debt Repayment Schedule by Instrument ($bn)

Chart 2: GRE Outstanding Debt by Borrower
(% of Total Debt)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Table 1: Dubai Government Related Entities Debt & Payment Schedule ($bn, Unless Otherwise Stated)

Entity

Debt Type

2020

2021

2022

2023

2024

2020-24

Beyond

Unallocated

Total

Dubai World

Bonds

0.00

0.00

0.00

0.00

0.00

0.00

6.65

0.00

6.65

Loans

0.33

0.00

0.36

13.89

0.21

14.78

9.75

1.49

26.02

Total

0.33

0.00

0.36

13.89

0.21

14.78

16.40

1.49

32.67

Investment Corporation of Dubai

Bonds

0.89

2.91

2.65

1.09

1.17

8.71

6.86

1.75

17.32

Loans

0.94

2.59

2.61

3.25

3.81

13.19

5.00

1.28

19.48

Total

1.83

5.50

5.26

4.34

4.97

21.90

11.86

3.03

36.80

Dubai Holding

Bonds

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Loans

0.00

0.23

1.09

0.00

0.00

1.32

2.18

0.09

3.59

Total

0.00

0.23

1.09

0.00

0.00

1.32

2.18

0.09

3.59

Dubai Customs

Bonds

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Loans

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Total

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Dubai Electricity & Water Authority

Bonds

1.50

0.00

0.00

0.00

0.00

1.50

0.00

0.00

1.50

Loans

0.00

0.00

1.00

0.00

0.00

1.00

0.40

0.00

1.40

Total

1.50

0.00

1.00

0.00

0.00

2.50

0.40

0.00

2.90

Total

3.65

5.73

7.71

18.22

5.19

40.50

30.84

4.62

75.96

% of Dubai’s GDP*

3.70

5.80

7.81

18.46

5.25

41.03

31.24

4.68

76.94

Sources: Refinitiv, Capital Economics. *As a % of 2020 Dubai GDP estimate.


James Swanston, MENA Economist, james.swanston@capitaleconomics.com