Dubai: Steady pace

Dubai’s economy is maintaining a steady pace of recovery, with confidence returning to the marketplace, investor appetite again being whetted and some of the longer-term development schemes starting to repay the faith and capital placed in them, though the need for care in managing the emirate’s debt burden remains key.

Having been hard hit by the global recession, and with some of the emirate’s leading state-backed corporations caught short with high debt exposure at a time when liquidity dried up, the economy is now back on a more even keel, though some sectors have yet to fully recover from the effects of the financial crisis.

While other countries in the broader region have seen their economies stall amidst political and social unrest, Dubai and the rest of the UAE have seen their reputation as an investment safe haven reinforced. Though there may have been some movement of hot money into the Dubai economy, with investors seeking somewhere safe to temporarily park their funds, others are again eyeing Dubai as both a sanctuary and a solid base for regional operations.

That improved sentiment is reflected in market assessments of Dubai’s debt risk and the costs of insuring against the increasingly remote prospect of default. Though the emirate’s debt remains high, Dubai’s five-year credit default swaps (CDS) dropped to below 325 basis points in early June, below the levels prior to November 2009. Having peaked at 655 basis points in February last year, Dubai has managed to slash its risk factor by half, which in turn will both make insuring against any debt risk less costly and the buying of Dubai bonds and debt more appealing to investors.

The underlying strength of brand Dubai, reinforced by the restructuring of the economy, is one reason for the fall in CDS risk, according to Rawad Hakme, the fixed-income allocation co-manager at Dubai-based EFG-Hermes UAE.

“Dubai’s perception as a safe haven amid the turmoil in the Middle East and North Africa” has helped its cause, Hakme told Bloomberg on June 2. “Simply put, everyone seems to want a piece of Dubai.”

Dubai officials will be hoping that is indeed the case, after they announced the emirate was re-entering the international capital market, looking to borrow up to $5bn through a new bond issue. In a presentation given on June 10, Dubai’s Department of Finance said it was planning to launch a dollar-denominated bond, with the funds to be used for general budgetary purposes.

According to a prospectus released to coincide with the announcement of the bond, Dubai’s economy grew by 2.4% last year, countering the same level of contraction experienced in 2009. Importantly, the prospectus showed how Dubai’s economy was evolving, shifting away from a focus on construction and real estate towards services, manufacturing, and logistics, all of which were identified by the government as future cornerstones of the diversified economy.

While the contribution to GDP made by the construction, property and business services sectors have all shrunk over the past few years, wholesale and retail trade has picked up the slack and now accounts for 30.3% of GDP, while manufacturing has risen from 10.6% in 2007 to 13.2% at present.

One of the sectors in which Dubai has invested heavily is aviation, with billions being spent on infrastructure – including what will be the world’s largest airport – along with developing supporting services and supply industries. The sector already contributes some 28% to GDP, a total that is expected to take off to 32% or $44.5bn by 2020, and is well on the way to repaying the investment made in the later part of the last decade.

Though the economy is returning to good health, there are still some concerns there could be a relapse if finances are not managed carefully. Debt levels remain high, with the Department of Finance saying the ratio of total direct debt to 2010’s nominal GDP stood at around 38% as of late May. However, overall debt is much higher, with some assessments placing the load at around $115bn, close to 140% of GDP.

While having been successful in rolling over existing debts, and now in line to raise new capital on the international market, Dubai will no doubt be looking to repay some of the credit it has been advanced, using earnings generated by its prospering sectors to reduce the red ink on the its books.

That process will take many years, even with sustained growth and stability in the global economy. However, with the more measured approach now being applied to economic management, and faith reaffirmed in the product that is Dubai, the balancing of the books looks to be just a matter of time.