Dubai’s hub position and increasing confidence in its repayment capacity along with Abu Dhabi’s fiscal strength are poised to drive UAE’s long-term growth, economists at Citigroup Global Markets said.
While Dubai benefits as a hub from increased south-south trade, it has been receiving substantial Chinese investment over the past two years, Citigroup economists said.
Dubai’s banking sector is better capitalised and more liquid relative to 2008-09, with more stable liabilities, meaning dependence on external funding is much lower than in mid 2008, they noted.
The Citigroup economists observed that the fast narrowing credit default swap, or CDS, spreads of Dubai underscored the increased confidence in the emirate’s ability to service its public sector debt in the near term. CDS spreads on the Dubai sovereign fell to their lowest level in over a year to 335 basis points.
Dubai Holdings Commercial Operations Group completed the repayment of a $500 million bond while DP World said it would pay off $3 billion of debt six months before it becomes due.
“We believe the outlook for the possible repayment of the remaining two bonds coming due this year is favourable. According to our calculations, the Dubai government-related entities, or GREs, would require $1.5-$2.0 billion in government support to avoid the need to restructure their debt, an amount that is achievable, in our view,” they said.
Although Dubai remains highly dependent on global economic trends, there are several mitigating factors that may reduce some risks associated with it, Citigroup economists said.
“The Arab unrest over the past year has helped Dubai differentiate itself as a stable business and tourism destination,” they said.
Citigroup said Abu Dhabi has the fiscal space to pursue its economic priorities and support direct government debt comfortably. “We are forecasting a government surplus in excess of Dh60 billion (eight per cent of the GDP) this year, with the budget staying in significant surplus for the foreseeable future.”
They expect Abu Dhabi government to continue to provide financial assistance to its GREs in the medium term. “The government’s commitment to support its GREs and the emirate at large was demonstrated with an effective $4.6 billion cash injection into Aldar, one of the emirate’s largest real estate developers, in December. The injection came in the form of asset purchases worth $2.5 billion and debt forgiveness worth $1.4 billion, with the remainder in cash to fund completion of the Central Market project, a mixed-use development in the heart of the city.
Citigroup noted that among other positive trends signalling an upturn are Abu Dhabi’s Tourism Development and Investment Company move to retender contracts for the Louvre and the merger plan of Aldar and Sorouh, two of the largest real-estate developers.
“We would expect any merger to result in a rationalisation of future development plans, in keeping with the government’s own efforts to reduce supply-risks and bolster the financial soundness of the emirate’s key companies, particularly the GREs,” Citigroup economists said.
Citigroup economists expect some loosening in overall fiscal and monetary conditions in Abu Dhabi relative to the previous two years, although the trimmed down plan is likely to mean a more moderate pace of growth in the non-oil economy than had initially been envisaged.
“We also believe the review process was not a one-off exercise, but heralds the beginning of stricter oversight of GRE budgets and development plans for the foreseeable future.”
Citigroup expects the UAE’s real economy to show strong momentum. For the tourism industry, which represents up to 25 per cent of the overall economy, 2011 was a good year. Hotel occupancy rates were the highest in the Middle East, at 78 per cent. It estimates the UAE’s full-year imports for 2011 grew by around 20 per cent relative to 2010.