Dubai: Regaining confidence in capital markets

Dubai’s capital markets are much better placed to handle the recent economic fall-out in the US and the eurozone, having learned several lessons from the 2008 global crisis and its own downturn two years ago.

Like stock markets around the world, the Dubai Financial Market (DFM) retreated in the wake of ratings agency Standard & Poor’s August 5 decision to downgrade the US’s credit rating. The DFM’s main index shed up to 3.7% in value on August 7, the first day of trading after the agency cut the US’s AAA rating, and almost as much over the two subsequent days of trading. However, the falls were nowhere near those posted in some other markets around the world, or even closer to home in the Gulf region.

Part of the reason for this is that Dubai’s capital markets have emerged from their own recent slowdown in a better position than before. Having seen a correction last year, the DFM has been moving slowly upward and the general index is now close to where it was a year ago. Many of the high-profile and high-level debts held by Dubai public and private entities have been restructured and are in the process of being cleared, meaning that the emirate is less exposed than it was when the full impact of the international financial crisis hit in 2008 and 2009.

Indeed, in what is being seen as a vote of confidence in Dubai’s economy and its debt market, in early August the state-owned Investment Corporation of Dubai (ICD) announced that it would repay all of the $4bn in debt it had falling due last month, rather than clearing part of the amount owed and rolling over the balance, as had been widely expected.

ICD, which controls Dubai’s flag carrier airline Emirates and aluminium producer DUBAL, said it would make the repayments using earnings from companies in its portfolio rather than having to turn to the capital markets for funding.

One concern for Dubai is that the US downgrade and the rising debt tide in the eurozone will make borrowing more difficult and expensive, with lenders potentially less willing to buy into bonds or other instruments issued either by the state or private entities.

An economist at Barclays Capital, Alia Moubayed, has said the cooling global economic climate and unsteady international markets could affect Dubai’s debt. “Given that Dubai is still restructuring its debt and faces repayments in 2012 of maturing corporate bonds, the continuation of risk aversion and market volatility could impact Dubai’s ability to raise funds at much-needed lower cost to improve its fiscal sustainability stance,” Moubayed told The National.

In mid-July, well before the US debt crisis broke, a report issued by Samba Financial Group said that while it was critical that the Dubai government continue to have access to capital markets at reasonable rates and take measures to strengthen its fiscal accounts, the emirate should be able to meet the next major debt spike in 2014, when some $20bn is due to be repaid. Importantly, the Samba report also noted that efforts to reduce debt and restructure the economy were paying dividends.

“Dubai sovereign credit default swap spreads and bond yields have been falling in recent months, suggesting that investors are confident that the government will have the means and willingness to make repayment of its direct debts a priority,” it said.

An immediate effect of the cooling global economy was a fall in international oil prices, which slipped to $111 a barrel in early September. Though Dubai is not a major oil producer, with hydrocarbons contributing less than 5% to GDP, a continued slump in prices will have a flow-on effect for the local economy. In a research note issued in mid-August, Khatija Haque, the GCC economist at Dubai-based bank Emirates NBD, warned that a weakening of the global economy could undermine the local recovery.

“Slower global growth would have a negative impact on non-oil international trade,” Haque said. “Tourism, retail trade and investment could also be negatively affected by weaker consumer and business confidence. These sectors are key growth drivers for a small open economy such as Dubai.”

Though it is too early to determine what effect this round of uncertainty in the global markets will have on Dubai, it is clear that past experience has better prepared the emirate’s economy, now leaner and restructured, on how to deal with the latest volatility.