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Recovery 'under way' this year

Dubai World's debt proposal to help brighten outlook of consumers and businesses, says Nomura

The UAE is emerging from the global financial crisis in a strong position, with Dubai World's proposed US$24.8 billion (Dh91.08bn) debt restructuring likely to spur a recovery in business and consumer confidence, says Nomura. This would allow the UAE Government to establish stronger regulations and increase transparency to ensure growth resumes on a more sustainable path, the Japanese investment bank said in a report.

"Although it still faces challenges, recovery in the UAE is under way," said Ann Wyman, the head of emerging market research Europe at Nomura. "It must still work through further deleveraging of its economy but the announced proposal of the Dubai World restructuring is in our view an important step forward in this process." Nomura forecast the economy would expand 2.1 per cent this year, a turnaround from its contraction of about 1 per cent last year.

Dubai World's debt problems have been a drag on the UAE economy, hampering its ability to recover from the global financial crisis, economists said. The recovery was further hobbled by a decline in the property market, with prices in parts of Dubai having fallen by up to 50 per cent from their 2008 highs. Nomura said value remains in Dubai Government bonds and credit default swaps (CDS) after Dubai World's proposals to restructure its debt. And despite the persistent wide spreads on Dubai's sovereign debt, recent indications of renewed market appetite for government-related issuers is positive, it said.

"Market pricing of Dubai's sovereign risk is not reflective of fundamentals, in our view," said Ms Wyman. "We think this will change over the year." The Dubai Electricity and Water Authority (DEWA) was the first Dubai borrower to test international investors since Dubai World announced its restructuring plans in November. DEWA issued $1bn of bonds this month, priced at 8.5 per cent. CDS linked to Dubai initially fell after the government said last month it would provide as much as $9.5bn for government controlled Dubai World. The conglomerate was still looking for creditors to agree to its proposals to extend their maturities by five to eight years. It also offered to repay in full the holders of the Islamic debt issued by its property development subsidiary Nakheel as the sukuk falls due.

"Dubai's debt looks attractive if you use the assumption that it is trading below par and Dubai World will repay its debt at full par," said Martin Kohlhase, the vice president of Moody's in Dubai. The spreads on CDS of both Abu Dhabi and Dubai debt were higher than those of other sovereign issuers with comparable fundamentals, Ms Wyman said. Dubai's five-year CDS stood at $411.30 yesterday, while Abu Dhabi's CDS fell slightly to $103.50, according to Bloomberg data. A CDS is an insurance-like contract that promises to cover losses on certain securities in the event of a default.

By clarifying that the obligations of Dubai World, and by extension, other government-related entities, did not carry an implicit guarantee of government support, the Dubai Government's contingent liabilities should be lower, said Ms Wyman in the report. "Commitment at the federal level to remain to honour sovereign debt remains unshaken." Nomura also said Saudi Arabia would be at the forefront of the recovery in the Gulf, with economic growth of 3.7 per cent this year that would be driven by increased oil output, loose fiscal and monetary policy and an increase in bank lending to the private sector.

"While the country's medium-term growth prospects remain inextricably tied to hydrocarbon production, it is making strides toward economic diversification," Ms Wyman said. "Business and consumer confidence is returning, and bank lending looks to have resumed, albeit at a slower and healthier pace." tarnold@thenational.ae

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