Several Dubai companies are opting to repay debts rather than roll them over as the year comes to a close. The repayments have helped reassure investors that Dubai has cash available to meet obligations, but also underscore how difficult new lines of credit are to obtain in the global credit crunch.
Investors have been scrutinising the debts of Dubai and its affiliated companies during the past few months. On Tuesday, the government-owned DIFC Investments announced it repaid a US$500 million (Dh1.83 billion) syndicated loan three days ahead of schedule, while the Dubai Holding Commercial Operations Group (DHCOG) announced last week that it had repaid Dh1bn in publicly traded eurobonds using internal capital, along with Dh1.4bn in bank loans. Analysts said the announcements were meant to reassure investors that the emirate had funds available to repay debt.
"In general, credit is tighter than it has been for as long as anybody can remember," said Richard Fox, the head of sovereign ratings at Fitch in London. The statements of repayment are "helping boost confidence or calm nerves... and generally suggest an awareness that sort of confidence-boosting exercise is necessary". About $27bn in debt will come due next year for large private and government-related entities in the UAE, according to Standard & Poors, a ratings agency.
Mohammed Ali Alabbar, a member of the Dubai Executive Council, said two weeks ago that the Dubai Government and its affiliated companies owed a total of $80bn, which, he affirmed, they were fully able to repay. The debts were backed by $90bn in government assets and $260bn in state-backed company assets, he said. Still, with both domestic and international credit markets remaining tight, analysts warn that UAE companies will continue to face funding challenges next year.
Companies that run short of cash may have to restructure or reschedule their debts or in some cases even default, according to MR Raghu, the head of research at the investment firm Markaz. "I don't expect many companies to either honour their debt or pre-pay their debt, and things are going to get really tight on the credit market," he said. The extent of the Government's support for companies during these times will make an important difference in how able they are to deal with the credit shortage, according to analysts. Dubai's Government has said it would stand behind government-linked companies. The Federal Government has also worked to pump funds into the banking system, which is expected to lend the money on to companies.
Over the past few months, the Government has promised as much as Dh120bn to help banks meet the country's credit needs, which were previously satisfied largely by international lending. However, only Dh50bn of the money has been injected into banks so far, and little of it has been re-lent into the wider economy, bankers say. Other Gulf governments have taken similar steps, with both Kuwait and Qatar using their sovereign wealth funds to support banks.
The Emirates Interbank Offer Rate has hovered above 4.4 per cent for the nearly two months, more than double where it stood in June. Economists say the Government may have to take additional action to alleviate the credit squeeze. "Efforts to provide liquidity comfort have been unsuccessful," wrote Mushtaq Khan, an economist at Citigroup, in a research note. "In our view, the authorities need to inject liquidity more aggressively, perhaps taking their cue from Kuwait and Saudi Arabia, if not from the US itself."