Dubai’s debt problems are far from resolved, but lower oil prices will not necessarily trigger a fresh crisis, according to Capital Economics.
The recent plunge in Dubai’s stock market, alongside a drop in oil prices, is triggering fears that the Emirate could face problems with its corporate debt.
Research company, Capital Economics, has produced a report explaining why, although Dubai’s debt problems are far from resolved, lower oil prices will not necessarily trigger for a fresh crisis.
As oil prices fell over the past months, Dubai’s equity market collapsed. The fact that Dubai stocks fell further than those elsewhere in the Gulf may seem unwarranted given that the Emirate’s economy is not directly dependent on oil.
“But as we’ve argued before, Dubai is reliant on trade with, and investment and tourism from, the rest of the Gulf,” said the CE report.
“Moreover, the fall in oil prices has stoked fears that Dubai could see a repeat of the debt crisis in 2009.
“These fears have centred on two things. The first is the impact that lower oil prices will have on the ability of quasi-public companies (GREs) to repay their debts.
“The second is that, if Dubai’s GREs did struggle to service their debts, the fall in oil prices might mean that the authorities in Abu Dhabi would be less willing to step in to prevent a spate of defaults, as they did in 2009.”
But despite this, there are several reasons why this will not equate to a repeat of the 2009 debt crisis.
“First of all, we don’t think that growth in the Gulf is about to collapse,” continues the report, which explains how large savings and low debt levels mean that the Gulf States should be able to fund budget deficits.
“As a result, governments across the region won’t need to tighten fiscal policy aggressively. What’s more, Dubai should benefit from a pick-up in the global economy,” it continued.
“Accordingly, it’s unlikely that the revenues of GREs will go into freefall.”
GREs have undertaken further debt restructuring in the past year; property developer, Nakheel, recently repaid $2.1bn of debt four years early and Dubai World is in the final stages of securing an agreement with its creditors to restructure its debts.
In its latest Article IV report on the UAE (released in July), the IMF estimated that Dubai’s GREs had to make around $54bn (around 35% of Dubai’s 2013 GDP) in debt repayments between 2015 and 2018, but the latest deals have reduced this by around a quarter.
“Finally, in spite of the fall in oil prices, we suspect that Abu Dhabi would not hold back from providing financial support if it was needed,” says the report.
“After all, it is among the best placed of the Gulf economies to withstand a period of lower oil prices – the government requires an oil price of just $45pb in order to balance its budget and the Emirate has almost $1trn of savings in sovereign wealth funds.”
That all being said, it acknowledges Dubai’s debt problems are far from over.
“The longer oil prices remain low, the more likely it is that GREs will struggle to repay their debts,” says CE.
“And there are other reasons to be cautious; although the debt repayment schedule may now be less arduous, at more than 50% of Dubai’s GDP, GRE debts are still large. And GREs may rack up even more debt in the coming years given that they are set to take on most of the construction work ahead of the 2020 World Expo.”
GREs are also likely to face higher funding costs as interest rates rise in line with the Fed (a result of the UAE’s dollar peg).
“In the near-future at least, we don’t think the recent fall in oil prices will be the trigger for a fresh debt crisis in Dubai similar to that in 2009, but the Emirate’s debt problems aren’t over yet and a prolonged period of lower oil prices, along with other concerns, could yet see GREs run into trouble,” the report concludes.
