Dubai stands taller than ever five years on from its debt crisis
Five years ago this week, Dubai was the focus of world attention for all the wrong reasons.
“Dubai shock after debt standstill call” was one headline, along with “A breathtaking blunder by Dubai” and “Dubai stuns debt markets”.
One British tabloid went further: “Bye-bye Dubai” it blazed across the front page, casting hysterical doubts on the emirate’s financial sustainability.
The reason for the explosion of negative coverage was the announcement on November 25, 2009 by Dubai World (DW) – the government-owned conglomerate - that it was seeking a “standstill” on debt repayments while it restructured some US$25 billion worth of borrowings it found itself unable to service according to agreed covenants.
The announcement came after months of speculation about DW’s financial health and sent equities and bond markets into a tailspin as investors downgraded their ratings of Dubai’s creditworthiness.
Dubai’s credit-default swaps (CDS, or the cost of insuring against a default and a measure of financial health) leapt to 700 basis points, putting Dubai on the same level as pariahs such as Iceland.
As DW was thought by many international investors to have a sovereign guarantee for its total $80bn of debt, the standstill sparked a rethink of global sovereign debt that would contribute to the euro-zone debt crisis.
But five years on, the emirate has restructured virtually all of its liabilities from 2009 and is in the process of refinancing the major part of DW debts on more favourable terms than bank creditors would allow during the intense negotiations of 2010.
The Dubai economy is booming, the property market has recovered and the emirate has embarked on another round of debt-fuelled expansion.
“No other government or corporate restructuring in the world has been so successful. Dubai has cleared its books and is ready to go again”, said one adviser to DW who did not want to be named.
So was it all a storm in a teacup?
There is no doubt the “standstill crisis” of 2009 hit the emirate hard.
The Dubai International Financial Centre, the financial free zone which brought in the likes of such international investment banks as JP Morgan, Lazard and Credit Suisse during the boom days, became a quieter place as lenders went through continuous phases of restructuring, layoffs and shifting staff back to headquarters in Europe and America.
Today, once more it is buzzing with activity. The DIFC governor Essa Kazim, marking the 10-year anniversary of the free zone, said he planned for the financial zone to double in size over the next decade with more companies from China and the wider Asia region.
“There’s this vibe again, but it’s healthier than before,” said Fathi Ben Grira, the chief executive at MenaCorp in Abu Dhabi. “It’s sound business. People are not looking at Dubai simply as a place to invest, but also as a hub to their other investments.”
A lot of the turnaround is due to the fact that Dubai has emerged as a safe haven after the Arab Spring.
“Just prior to 2008 a lot of cities in the region were trying to compete with Dubai. Today most of these projects have been wiped out. There’s no competition for Dubai and the outlook is good,” said Sebastien Henin, the head of asset management at The National Investor, an Abu Dhabi-based boutique investment bank.
Property projects cancelled during the crisis are now being revived.
In July, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, unveiled plans for the Mall of the World, which would be the world’s biggest mall, at a cost of Dh25 billion.
“These projects will be developed in phases and not in one shot,” Mr Henin noted.
The capital markets have largely recovered from the beating they took in 2009-2010, with stocks boosted by the upgrade to MSCI emerging market status. The Dubai Financial Market General Index is up more than 35 per cent this year, after rising 107 per cent last year. That compares with a more than 70 per cent decline from its peak in 2008 to February 2009.
Much of the rally has been fuelled by Dubai’s successful bid to host the Expo 2020, which has kick-started the next wave of infrastructure projects, hotels, entertainment and property offerings.
“Dubai has been smart enough to continue to invest, even after 2008, in terms of infrastructure,” Mr Henin said. “They increased their core capacity and, for example, didn’t stop the purchase of aircraft for Emirates. This has come around to their advantage.”
Dubai’s CDS level has dropped dramatically since the crippling highs of 2009. It now stands at about 181 basis points on five-year debt, an historically low level.
“With the recovery of asset prices, especially in the all-important property sector, it has been easier to sell assets at good valuations and get new financing at favourable terms,” said Nabil Farhat, a partner at Al Fajer Securities.
In July, Dubai’s biggest lender, Emirates NBD, repaid its final instalment of $3.27bn received in 2008. It was the last of more than $19bn worth of liquidity provided to UAE lenders by federal authorities as a buffer amid the global financial crisis.
Dubai’s multibillion dollar obligations to Abu Dhabi entities – which were essential in getting Dubai through the 2009 crisis – have been refinanced on a longer-term basis.
The Dubai developer Nakheel, which was at the thick of it in 2009 with $10bn of loans in danger of default, repaid the last of its bank debt in August, well ahead of a schedule ending in 2018. This came amid a return to profitability in the property sector and a resumption of big-ticket projects.
Over the past five years, a pattern has been set as Dubai has made payments on bonds and sukuk fixed-interest debt ahead of or on time, while bank lending has been refinanced and rescheduled after negotiations with creditors. The government repaid Dh7.1bn of Islamic bonds earlier this month – a reflectionof its “commitment to repay all liabilities as per schedule”, it said.
At the same time, DW is in the process of finalising a deal with creditors to push back payment of some $10bn due in 2018 for another four years. In contrast to 2009, it has been able to offer creditors some collateral for the new terms, in the form of shares in DP World, the global ports company its owns, and access to cash-flow from other operations.
Dubai Holdings has also been successful in refinancing $10bn of debts in its financial business.
The emirate still has a lot of debt. The IMF is working on a new assessment of aggregate debt in Dubai, in the light of repayments and refinancings, but it is unlikely to change dramatically from its current figures: a total of $142bn of government and GRE borrowings. But there is a recognition at the IMF that Dubai is on a sounder footing than before.
The new feel-good factor in the Dubai financial scene is a belief that the emirate has learnt from the dark days of 2009, and has taken steps to ensure such a near-thing will not befall it again.
A raft of regulatory changes were made after the 2009. The Central Bank introduced new regulations to control bank exposure to government related entities.
Last year, the Central Bank issued rules on mortgage lending, based on a loan-to-value ratio, which limited financing to expatriates to 75 per cent of a property’s value for first-time purchases of less than Dh5 million. For Emiratis, the first time borrowing limit was kept at 80 per cent of a property value of less than Dh5 million.
In July, Dubai was studying the off-plan transactions market amid plans to introduce new regulations to control speculative flipping on properties sold before they are built.
Yet despite a 51 per cent surge last year in property prices, which has hiked inflation and affected small companies who need to pay higher wages for their staff, Dubai is buzzing with activity.
In light of the recovery in the emirate’s financial health, the doom-and-gloom headlines from 2009 look distinctly overwrought. With hindsight, maybe the best summary of the situation back then came from The Economist in the headline: “Dubai – standing still, but still standing.”
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