Dubai debt better positioned against shocks, report says

Dubai’s debt – which is currently estimated at 129 percent of GDP – is better positioned to withstand shocks, but risks remain due to tighter public finances and liquidity, Bahrain-based investment bank SICO said in a new report.

Dubai owes $51 billion in debt due to mature over the next two years, with $13.5 billion anticipated to mature this year – including debt owed by government-related entities (GREs), the report said, citing IMF estimates.

Interest expenses are set to reach $626 million (AED 2.3 billion) this year, accounting for 5 percent of the emirate’s revenues and 1 percent of its overall outstanding debt.

Meanwhile, Dubai will see $22 billion worth of debt mature in 2018, of which a large portion ($20 billion) is owed by the government, SICO said. 

Dubai signed an agreement with Abu Dhabi and the United Arab Emirates Central Bank in 2014 to roll over $20 billion for five years, with $10 billion in bonds owed to the central bank and another $10 billion to the Abu Dhabi government, at a fixed interest rate of 1 percent.

The Dubai government’s key maturities, particularly between 2016 and 2018, will increase short-term debt rollover risks, given tightening domestic and regional liquidity as well as mounting competition from governments to finance deficit.

This will translate into a higher cost of funding, which in turn will “ultimately increase the strain on Dubai’s debt servicing capacity and budget expenditure, while also impacting the financial system,” the report said.

While GREs remain a major driver of growth in the UAE and Dubai, their high debt continues to add financial and fiscal pressure, SICO said, noting that the global financial crisis had forced many entities to restructure debt after years of benefitting from government transfers and extensive borrowing.

However, although GRE leverage remains high, its composition has shifted from loans to bonds, the report said. 

According to the IMF, loans accounted for 65 percent of Dubai’s total debt last year compared to 71 percent in 2010, while bonds accounted for 35 percent, against 29 percent in 2010.