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Mon 2 Jan 2012 10:25 AM

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Dubai plan to cut state spending urges bond upturn

Gulf emirate aims to halve budget deficit in 2012, narrowing shortfall to AED1.83bn

Dubai plan to cut state spending urges bond upturn
Dubai and its related companies shoulder $129.3bn of debt

Dubai government bond yields tumbled the most in four weeks
after the Gulf emirate pledged to halve its 2012 budget deficit as state
companies confront $15.5bn in debt maturing this year.

The sheikhdom, which was on the brink of default in 2009,
said Dec 25 it aims to reduce spending this year by 4.2 percent, narrowing the
shortfall to AED1.83bn ($498m), or 0.6 percent of gross domestic product, from
a 2011 target of AED3.78bn. Since, the yield on the government’s 7.75 percent
bond due October 2020 fell 36 basis points, or 0.36 percentage points, to 6.92

“A conservative budget puts the authorities in a good
position heading into 2012,” Khatija Haque, a senior economist at Emirates NBD,
the UAE’s biggest bank by assets, said by email. “The authorities are confident
that all the financial obligations will be met next year.”

Dubai and its related companies shoulder $129.3bn of debt,
amounting to 149 percent of GDP, of which $15.5bn is due in the coming 12
months, according to Bank of America Merrill Lynch estimates. The emirate
borrowed the money during a regional economic boom to turn itself into a financial,
trade and tourist hub.

Home to the world’s tallest tower and islands shaped like
palm fronds, Dubai was untouched by political unrest that swept through some of
the Middle East last year. The emirate is betting a turnaround in tourism and
trade will contribute to a 1.8 percent increase in state revenue in 2012,
helping reduce the deficit as it trims infrastructure spending by 21 percent.

Passenger traffic at the Dubai airport, the world’s fourth
busiest by international passengers, jumped 7.8 percent in the first 11 months
of 2011 to 46.3 million, Dubai Airports said Dec 28. Some 10.5 percent more
containers by volume were handled by port operator DP World during the first
three quarters of 2011.

“Two of the legs that the Dubai economy stands on, that is
tourism and trade, are doing quite well,” Abdul Kadir Hussain, chief executive
officer at Mashreq Capital DIFC, said Dec 28.

Since the two industries are the “most exposed” to global
trends, a cautious fiscal stance is warranted, he said. “If China slows down,
you could potentially have quite an impact on trade and commodity prices.”

To reduce the deficit, Dubai scaled back the allocation for
development spending to 41 percent of the 2008 level.

In 2009, Dubai borrowed $20bn from the United Arab Emirates’
central bank, the Abu Dhabi government and banks in the capital to help its
companies weather the global credit crunch, which triggered a real-estate crash
and led the economy to contract 2.4 percent.

GDP grew 2.8 percent in 2010 and may have expanded 3.5
percent in 2011, said Emirates NBD. Growth may slow to 2.5 percent in 2012
because of a recession in Europe and lower growth in Asia and the US, it said.

Yields on Dubai government debt fell more than the Middle
East average in 2011. The 7.75 percent bond yield dropped 169 basis points,
compared with a 28 basis-point decline to 4.91 percent in regional sovereign
bonds tracked by the HSBC/Nasdaq Dubai Middle East Conventional Sovereign U.S.
Dollar Bond Index.

The perception of Dubai’s credit risk remains the worst in
the Middle East and North Africa after Egypt and Lebanon even following an 92
basis-point decline in five-year credit default from an Oct. 4 annual peak. For
the year, credit default swaps rose 30 basis points to 445, data provided by
CMA show.

Dubai government-related companies dealing with debt
maturities and refinancing in 2012 face “significant risk” from the weakening
global economy, regional popular unrest, and volatility on equity and bond
markets, Standard & Poor’s analysts, led by Tommy Trask, said in a report
Dec 26.

Much of investors’ attention will center on three state-
related entities with securities maturing this year. Jebel Ali Free Zone, which
operates an industrial park next to Dubai’s port, must pay AED7.5bn ($2bn) on
an Islamic bond maturing in November.

“The one that everyone has their eyes on is Jebel Ali Free
Zone,” Mashreq Capital’s Hussain said. “They have options. The company
generates decent cash flows. It’s a dirham sukuk so I assume a lot of it is in
local and regional hands, which generally will be a lot more friendly” if the
government wants to extend the sukuk’s maturity.

Dubai Holding Commercial Operations Group, a property and
hotels company owned by the emirate’s ruler, has a $500m bond due in February,
which it said Dec 6 it would repay with its own cash.

DIFC Investments, which owns and manages properties in the
Dubai International Financial Centre, must repay $1.25bn of its bond in June
2012. It had planned to raise $1bn from asset sales by the end of last year to
support debt repayment. DIFC should be able to get funding from banks or
capital markets to pay off the due, Mashreq Capital’s Hussain said.

Dubai vowed in September to stand behind its “strategic
investments” including those facing debt refinancing such as DIFC Investments.

“We’ll back up any strategic investment we have,” said
Mohammed AlShaibani, director general of Dubai ruler’s court. “As Dubai, I have
interest to back up the government entities and the government-related
enterprises - anything that’s sizable with a major benefit to the economy.”

The government raised $500m in June from the sale of a
10-year bond that received more than $1.8bn in bids. Emirates, the world’s
biggest airline by international passengers, sold $1bn of 5-year bonds the same
month, after getting orders for more than six times that amount.

Any rollover of Dubai’s debt should be “smooth, assuming
global risk aversion does not deteriorate dramatically following the sovereign
debt crisis in Europe,” Ahmed Talhaoui, the Abu Dhabi-based head of investment
and asset management at Royal Capital, said by phone Dec 27.

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