Dubai issues US$20bn bonds

Wayne Arnold and Travis Pantin

• Last Updated: February 23. 2009 8:30AM UAE / February 23. 2009 4:30AM GMT

The Central Bank has subscribed to the first US$10 billion (Dh36.7bn) of what will eventually be a $20bn bond programme launched by Dubai to help it meet its financial obligations and press ahead with its development plans, the Dubai Department of Finance said yesterday.

Economists said the news, the clearest signal yet of federal support for an individual emirate’s finances as the nation navigates the global economic crisis, was almost certain to buoy financial markets, which have been affected in the past week by concerns over whether Dubai would have to work alone to cover an estimated $13.2bn in loan payments due this year.

“This is the most important piece of news to come out for the Dubai market since the financial crisis,” said Ali Khan, director of Arqaam Capital in Dubai. “This shows that there is a federal will to respond to the current challenges at the state level and at the federal level.”

The Finance Department plans to issue five-year bonds paying 4 per cent interest per year.

“This issuance will provide Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations,” the department said in a statement. “This programme will secure the necessary funding for Dubai to meet its financial obligations and continue its development programme.”

Dubai’s government and government-owned corporations have an estimated $80 billion in combined bonds and other outstanding loans, amassed to help finance the breakneck growth and economic diversification that have made it a developmental model for the Middle East.

But the global credit crisis has put Dubai, like companies and countries across the world, in a hammerlock between evaporating credit to refinance debt and falling revenues as international trade and economic growth grind to a halt.

Dubai, as the region’s hub for trade and capital flows, has proved particularly vulnerable. “This is an open economy,” said Raed Safadi, chief economist for the Government of Dubai, in an interview. “It admits the world’s prices and the world’s shocks with the same vigour that it admits tourists, re-exports, imports.”

Without significant oil income of its own, Dubai has been able to borrow like a petroleum exporter because of its close connections with Abu Dhabi, which has nine per cent of the world’s oil reserves. Investors have long assumed that Abu Dhabi and the federal Government would stand behind Dubai and other emirates, enabling them to borrow at lower costs than they otherwise could based on their individual finances.

But analysts estimate that Abu Dhabi’s own assets, held through sovereign wealth funds such as the Abu Dhabi Investment Authority, may have shrunk by 25 per cent or more as oil prices fell and the international capital markets have been in turmoil.

With such dramatic declines in wealth and escalating costs for borrowing, concern began to grow over whether Dubai could count on federal assistance if it needed it, especially after Abu Dhabi this month injected Dh16bn into five of its own banks.

Analysts said Dubai had sufficient cash to meet its immediate financing needs, but that the costs of doing so were expensive both financially and economically. Last week, Borse Dubai managed to raise $2.5bn from bankers in the UAE and abroad, but also reached out for $900m cash from the Dubai government to meet its own $3.4bn loan repayments.

“Clearly Dubai has liquidity issues,’’ said Farouk Soussa, the head of Middle East government ratings at Standard and Poor’s in Dubai. “Many of its assets are tied up in foreign investments and given the state of international markets, the choice is either to liquidate them at a fire sale price, or to secure a bridge loan, or financing that will tide them through the difficult period that is expected to last over the next one or two years. In the meantime, they’re looking to borrow and the government of the UAE is helping them do so.”

The Central Bank money does not come directly from Abu Dhabi, whose oil income goes predominantly into its own sovereign wealth funds, but rather from inflows of capital and trade. Nevertheless, analysts said Abu Dhabi, as the Central Bank’s largest stakeholder, would probably have supported the purchase. With the $10bn of Central Bank loans cementing federal support for its debt, Dubai and its companies, such as Emirates Group, Nakheel and Dubai Aluminium, will be able to borrow from private lenders at much more competitive rates, they said.

warnold@thenational.ae

tpantin@thenational.ae