Author: Gordon Platt

Despite a fast-growing economy and plans to boost growth via infrastructure investments, debts are mounting again at Dubai’s government-related entities. Is the day when Dubai World almost collapsed coming back to haunt investors?

The aftereffects of the 2009 financial crisis still haunt Dubai. On the surface, everything seems to be going swimmingly for the United Arab Emirates, which is the biggest market for US exports in the Middle East and a leading oil producer. The property and stock markets are booming, tourist arrivals are up, foreign direct investment is pouring in, and a surge of infrastructure development is anticipated ahead of the World Expo 2020, which is expected to attract 25 million visitors to Dubai. Digging deeper, however, analysts question how the UAE will manage its massive debt overhang while funding planned
new megaprojects.

At the center of concerns are the mysterious government-related entities, or GREs, known collectively as Dubai Inc. GREs are institutions that are owned, in whole or in part, by the government or ruling families. Prior to Dubai’s 2009 debt crisis, GREs were presumed to have the backing of the sovereign state. They are used to finance and implement government projects, mainly in the real estate sector. Dubai World, one of the biggest GREs, nearly collapsed in 2009. The company’s debt has since been restructured, and it faces a $5.5 billion repayment, due in September 2015.

Out of a total of $51 billion of outstanding bank loans to Dubai’s GREs, $24 billion (or 16.5% of Dubai’s GDP) is due to mature between this year and 2016, according to London-based Capital Economics. “While the maturing debt burden is less grueling than that faced in 2009, it is still substantial, and it’s not clear whether all companies will be able to repay,” says Jason Tuvey, assistant economist at Capital Economics.

GREs were expected to sell assets to fund upcoming debt repayments, but asset sales have been slow, owing to protracted negotiations and dickering over price. “It looks increasingly likely that further debt restructurings may be needed this year and next year,” Tuvey says.


Meanwhile, GREs could run up even more debt, since they will be required to undertake most of the construction work ahead of the World Expo, Tuvey adds. Dubai needs to double its hotel inventory to meet the demand of tourists by 2020. It recently announced such major new projects as a 2,000-seat opera house and a theater district, as well as Aladdin City, a complex of three towers including a hotel, which will be built in the air space above the Dhow Wharves on Dubai Creek. A safari park, a crocodile park and a Quran park, featuring trees and plants mentioned in the Quran, are also planned to boost tourism.

The Dubai Metro will be extended to the World Expo site, close to the newly opened Al Maktoum International Airport. Dubai’s original international airport passed London’s Heathrow in the first quarter to become the world’s busiest airport for international passengers.

“If Dubai goes on another debt-fueled boom, Abu Dhabi would undoubtedly be more reluctant to provide help in any subsequent bust,” Tuvey says. In March the UAE central bank and Abu Dhabi, the capital city and emirate that controls most of the oil wealth, agreed to refinance $20 billion of debt extended to Dubai during the 2009 crisis. The debt was rolled over for five years at a 1% annual interest rate, down from 4%.

The Development of a domestic debt market, in my view is a national priority. Companies, particularly large private companies and GREs, need an alternative to bank lending."                                      - Sultan Bin Nasser                                                    Al-Suwaidi,                                                          UAE central bank

While the rollover agreement was an important step in Dubai’s recovery from the 2009 crisis, concerns surrounding GRE debt are likely to cloud the economic outlook for the foreseeable future, Tuvey says. Because the UAE dirham is pegged to the dollar, the central bank will have to raise interest rates if the US Federal Reserve tightens policy next year. What’s more, a potential fall in oil prices could trigger renewed debt problems, Tuvey says. Dubai’s economy relies on tourist arrivals and investments from the other member states of the Gulf Cooperation Council, which depend heavily on oil revenues.

Some debt problems are already apparent. According to Debtwire, which provides data and analysis on distressed debt, Limitless, a major Dubai GRE and master developer, approached lenders in February with a waiver request for the first amortization payment of $400 million, due this December under its 2012 restructuring of a $1.2 billion loan. The Dubai company sought to extend the repayment schedule by one year, well in advance of the December due date, to ensure it has time to secure the required unanimous lender consent.

According to Debtwire, lenders seemed unimpressed with the proposal, which offered a very small prepayment. Limitless is lagging behind in its asset-sale plans and has yet to exit real estate developments in Russia and Saudi Arabia, which were first on the sales list, along with an apartment block in Dubai.

Meanwhile, Dubai World requested proposals to manage $4.4 billion in loans maturing in March 2015, which pay little interest and are not government-guaranteed. Dubai World said last year that it would be willing to sell its 5.3% stake in Nevada-based MGM Resorts International for the right price.


The fact that further loan restructurings may be needed could make banks reluctant to lend to GREs, according to Tuvey. The prospect of having to take further losses on loans, he says, is making the banks cautious. There is very limited public data available on GRE debt, and most of what is available comes in aggregated form from the International Monetary Fund. “The banks may have learned their lesson,” Tuvey says. Bank credit is unlikely, in his opinion, to provide the same support to the economy as in the past.

Turvey, Capital Economics: "Further debt restructurings may be needed this year and next year."

Winning the World Expo bid strengthened the UAE’s growth prospects, the IMF says. Real GDP is forecast to grow 4.4% this year, as tourism, retail sales, trade and property sectors expand. The total cost of the Expo, the pace of project execution, and financing remain uncertain. Following an IMF staff visit to the UAE in January, head of mission Harald Finger said: “If not executed prudently, these projects could exacerbate the risk of a real estate bubble. Moreover, these projects may create additional financial risks for Dubai’s GREs and the banking system.”

The UAE has set exposure limits of 100% of capital for local bank lending to federal and local governments and GREs, in order to reduce systemic risk. After issuing the rules last November, UAE central bank governor Sultan Bin Nasser Al-Suwaidi said: “The development of a domestic debt market, in my view, is a national priority. Companies, particularly large private companies and GREs, need an alternative to bank lending.”

Sukuk, or Islamic bonds, could fill much of the gap. In April the Dubai Financial Market, the main exchange, published new standards for structuring, issuing and trading sukuk in its market. The standards, which seek to clarify the legal status of sukuk, including the rights of investors in the case of default, are part of a broader effort by Dubai to become “the world capital of the Islamic economy” within three years. In announcing the initiative, sheikh Mohammed bin Rashid Al Maktoum, vice president and prime minister of the UAE and ruler of Dubai, said: “Our firm principle in the UAE is not to rely on any single economic resource or sector. The Islamic economy is not new to us. In fact, we have accumulated considerable experience in this field, and our aim is the global arena.”

Dubai intends to set Islamic standards, not only for financial services but also for halal food, cosmetics, pharmaceuticals and other products. The emirate also plans to open an Islamic corporate governance center. The standards will not be compulsory, but companies that follow them will receive certificates of shariah compliance.

Islamic finance is growing faster than the conventional banking sector. The total value of sukuk listed on Dubai capital markets reached $18.6 billion in the first quarter of 2014, more than double the level of a year earlier.

The biggest sukuk so far this year was a $1 billion issue from the Islamic Development Bank. The government of Dubai sold $750 million of 15-year sukuk, lengthening the maturity of its borrowing. Real estate firm Damac listed a $665 million sukuk in April, which was increased from an originally planned $500 million. Early this year, Dubai Investment Park’s $300 million sukuk was more than 12 times subscribed.

Meanwhile, the Dubai stock market was among the leading performers globally last year, with a gain of 108%. As of late April 2014, the market was up an additional 51% for the year to date. The first initial public offering on the Dubai Financial Market’s main index in five years, a cash shell named Marka, was 36 times subscribed. Marka plans to invest in fashion retail outlets and cafes in the GCC countries.

The UAE and neighboring Qatar have been attracting heavy inflows of foreign funds ahead of MSCI’s upgrade of both countries to emerging market status, effective
June 2 this year. Many companies have increased their foreign-ownership limits to accommodate more international investors.

With the economy humming along and capital markets soaring, the recovery in asset prices has enabled some companies to repay part of their debts ahead of schedule. However, bankers have not forgotten November 26, 2009. Dubai World, with $59 billion of liabilities, spooked the markets with a request to delay payment of $26 billion of debt for six months. The shock waves are still being felt.


November 26, 2009: Dubai World, the investment vehicle for the emirate, requested a six-month delay on repayment of $26 billion of its debt, which plunged local and global financial markets into a downward spiral as investors feared an imminent default.

November 30, 2009: Dubai’s Finance department stated that Dubai World’s debts were not guaranteed by the government.

December 14, 2009: The Dubai government received $10 billion in aid from Abu Dhabi for Dubai World, which used $4.1 billion to repay its Nakheel property unit’s Islamic bond, due the same day.

July 22, 2010: Dubai World and its creditors met at the Dubai Atlantis Hotel, but no agreement was announced.

October 27, 2010: Dubai World’s debt restructuring was eventually finalized. Maturities were extended by an average of five years on $14.4 billion of debt with 90 banks. A $10.5 billion debt to the Dubai government was converted into equity through the Dubai Financial Support Fund.

March 12, 2014: Dubai World requested proposals to manage $4.4 billion in loans maturing in March 2015.

March 16, 2014: Abu Dhabi and the UAE central bank rolled over $20 billion of Dubai government debt for five years at 1% annual interest.

March 2018: Dubai World has a $10 billion repayment due, which could require the sale of strategic assets.