Dubai's ability to finance its debts has improved because of stronger economic growth and more conservative spending, but the emirate would still be vulnerable in a major downturn of the global economy, the International Monetary Fund said.
Dubai's government debt is expected under a baseline scenario to fall gradually to 41.6 percent of gross domestic product in 2019 from 60.2 percent last year, the IMF said after annual consultations with the United Arab Emirates.
That would be well below a peak of 66 percent in 2009, when a property market crash pushed Dubai to the brink of default and jolted financial markets around the world - though it would still be far above 15.4 percent in 2007, before conditions started deteriorating.
"Although Dubai's debt could still become unsustainable under severe shocks, the outlook has improved," the IMF said in a report. "Continued fiscal consolidation and improving growth prospects have been strengthening Dubai's resilience to external shocks."
Under the scenario of a severe global downturn, however, Dubai's debt would jump to 71 percent of GDP in 2019. This scenario assumes a shock to economic growth, lower inflation-adjusted interest rates, and deterioration in Dubai's budget balance excluding interest payments.
A third scenario - a global downturn plus a real estate shock during which the government would take over 20 percent of the debt of government-related enterprises - would boost the ratio as high as 86 percent.
The IMF predicted Dubai's economic growth would average a healthy 5.6 percent in the next six years, boosted by big real estate projects and preparations to host the Expo 2020 world's fair - but growth would only be 3.5 percent if the global economy came under stress again.
Together with its GREs (government related enterprises), both majority- and minority-owned, Dubai will have to repay some $141.7bn in coming years, or 141 percent of its 2013 GDP, the IMF estimated. Of that sum, $92.2bn would mature before the end of 2019.
The heaviest repayments of bonds and loans would hit Dubai in 2018, when some $40.3bn is due. However, firms such as property developer Nakheel, which were forced by the crash to restructure their debts, have been aiming to repay ahead of schedule in recent months.
The IMF also repeated its frequent warning about rapid property price rises in Dubai, saying authorities had agreed in conversations with the Fund that further measures, including higher, targeted fees, might be needed to tackle speculative demand for real estate.
The Dubai government also indicated that it would execute big real estate and infrastructure projects gradually, keeping its plans flexible and in line with demographic forecasts, the IMF added.
Dubai's government finances are forecast to swing to a small surplus of 0.5 percent of GDP in 2014, turning positive for the first time since 2006, from an estimated deficit of 0.3 percent last year, the IMF report shows.
Overall, while the UAE is likely to cut its fiscal spending to AED317bn dirhams ($86.3bn) this year from a record AED324bn in 2013, its budget stance is still too expansionary to save enough wealth for future generations, the IMF said.
In oil-powered Abu Dhabi, which accounts for 78 percent of the overall budget expenditure in the UAE, spending is projected to decline to AED241bn in 2014 after peaking at an estimated AED254bn last year, the report showed.
Abu Dhabi, which accounts for almost all of the UAE's crude oil output, does not publicly release budget plans or regular updates on actual spending.