Middle East: Looming maturities dull Expo party in Dubai
New borrowing for festival costs; $22 billion due 2014, says IMF
Residents around the 828-metre-high Burj Khalifa in Dubai might be forgiven for becoming jaded with the frequency of firework displays launched from the tower. New Year celebrations aside, November 27 witnessed another spectacular – minutes after Dubai was chosen to host the world’s fair, Expo 2020.
|A firework display based around Dubai’s Burj Khalifa launched celebrations after the Emirate was announced as host of Expo 2020|
But concerns about Dubai’s debt have dampened expectations of an economic boom leading up to the event. The Institute of International Finance estimates that at the end of 2013 Dubai was sitting atop a $144.5 billion debt pile (equivalent to 100.2% of GDP). The IIF forecasts that it will rise to $168.5 billion by 2020, although it expects the debt-to-GDP ratio to fall to 70%. The forecasts imply new borrowings to finance the Expo. Even with the reduced debt ratio, the IIF describes anything over 70% as "very high indeed". Most immediately, Dubai faces a crucial hurdle in 2014, five years after the 2009 debt standstill announcement from state-owned conglomerate Dubai World.
The first tranche of Dubai World’s $25 billion restructured debt falls due in 2015. However, according to calculations by the IMF, around $22 billion of Dubai sovereign debt – mostly in the form of bonds owed to Abu Dhabi and the UAE central bank – plus $8 billion in government-related-entity debt, falls due this year.
Put in context, the sovereign debt portion alone is similar to the Spanish government’s debt maturities in 2014. For creditors, Dubai’s 2014 maturities will be another test of the emirate’s rehabilitation, and the manner in which debt is repaid or restructured will have an impact on sentiment.
Mohamed Al Hajj, an analyst at EFG Hermes in Dubai, says he remains confident about the 2014 maturities: "We expect few difficulties with debt in 2014." He says EFG Hermes expects debt owed by the Dubai government to the UAE central bank and Abu Dhabi-owned institutions – the biggest chunk – to be rolled over.
It is a view echoed by Adel Afiouni, head of EMEA investor solutions and placement at Credit Suisse. He thinks Dubai’s economic performance will help. "[With] positive sentiment and overall excess liquidity in global markets, debt servicing and management of 2014 maturities should be positive, as demonstrated by market support and confidence in Dubai debt," he says.
In recent years, Dubai has paid off liabilities as they have become due, in some cases with new borrowing. Dollar-bond issuance by the Dubai government early in 2013 was heavily oversubscribed. Credit default swaps also remain favourably priced, at around 215 basis points in early December, according to data provider CMA.
In a bullish report following the Expo award, Standard Chartered said the benefits of staging the event should far outweigh the costs, with housing and hospitality being the principal beneficiaries. It estimates the bill for Expo 2020 to be approximately $9 billion, 8% to 9% of GDP.
"The costs look manageable relative to the size of Dubai’s economy, in spite of maturing debt of government and related enterprises between 2014 and 2016 estimated at $64 billion by the IMF," says Carla Slim, MENA economist at Standard Chartered.
However, Farouk Soussa, chief Middle East economist at Citi, says Dubai will likely resort to new borrowings, at least in part: "Some of it may be raised in the markets and Dubai will have to manage its debt issuance strategy closely. That said, we expect the majority of the expo expenditure to be funded through diverted planned capex, GRE revenues, bank lending and other sources."
The Dubai government says 25 million people will visit Expo 2020 at a purpose-built 438-hectare site close to the new Al Maktoum airport, equidistant to Abu Dhabi and Dubai. That compares with the 10 million tourists who visited Dubai in 2012. Capital Economics in London says Dubai’s expectations for Expo 2020 might be optimistic.
But if the arrivals do materialize, the extra boost to the economy could be 7% to 10% of GDP, Capital Economics says in a research note. Standard Chartered says close to 300,000 jobs will be created, mainly between 2018 and 2021, which it says will support the housing market. However, Capital Economics worries that extra spending might lead to overcapacity in housing, hospitality and infrastructure.
Slim says it is not an issue. "This is not a major concern for us," she says. "Dubai is already a well-established tourist destination and hotels are already operating at close to 80% occupancy rate. As for the housing market, it is already on a recovery path. Expo-related jobs will support strong demand for housing in the years leading up to 2020."
But as the emirate looks forward to Expo 2020, creditors’ hopes that Dubai’s loftier ambitions were finally expunged after post-crisis debt restructurings might have been dashed. Emirates Airlines, Dubai’s expansive flag carrier, threw down a $99 billion order for Boeing and Airbus jets at the Dubai Airshow in mid-November. In the past few months, several new construction projects have been announced, many to be undertaken by government-related enterprises.
Garbis Iradian, deputy director, Africa and Middle East, at IIF, cautions: "Markets could become concerned about the renewed cycle of exuberant risk-taking."