Exploding Dubai's debt myths

It has become commonplace to refer to the fallout from last week's decision by Dubai to ask Dubai World's creditors for a six-month delay in payments as a "debt crisis". It is not. What Dubai and the UAE now face would be more accurately described as a crisis of transparency and information. For it is the uncertainty over why Dubai made its decision and what it plans to do next that has generated the anxiety now gripping financial markets. The situation at Dubai World does not appear to pose the kind of systemic risk that created past crises, either the one that erupted after the bankruptcy of Lehman Brothers last year or previous debt crises in Asia or Latin America. That does not mean that last week's events cannot trigger a broader crisis of confidence in emerging markets inflated by cheap dollars. Economists have been warning that a wave of government stimulus has created an unsustainable bubble in developing economies not unlike the one that burst in September last year. But Dubai World's current predicament is part of the clean-up of the debris of that earlier bubble. Feeding the confusion are a number of misconceptions about what is going on at Dubai World and what risk it poses to the financial system here in the UAE and abroad. One of the most commonly repeated is that Dubai World has US$59 billion (Dh216.7bn) in debt. Dubai World and the companies it controls have between them $59bn in liabilities. But that number includes a lot of obligations that are not conventional debts, analysts say. Excluding these, Dubai has a much more manageable $23.8bn in debts, according to Deutsche Bank's estimates. Of that, only about $5bn is owed directly by Dubai World. And not all of the remaining $18.8bn is affected by last week's decision: Dubai has already said that ports operator DP World and the Jebel Ali Free Zone Authority (JAFZA) will not be included in the debt restructuring. The Nakheel sukuk is due on December 14, but it now appears that Dubai will ask that holders of the bond agree to delayed payment. Clearly, this is not what markets expected. Judging from the price of Nakheel's sukuk the day of the announcement, its repayment was considered a virtual certainty. If Nakheel does not pay on December 14, with or without the agreement of its creditors, the non-payment will not represent a sovereign event. Nakheel's sukuk was never a government debt, never enjoyed the explicit backing of the Government of Dubai and never had a credit rating. Dubai's Government underlined this distinction in its bond prospectus in October, which analysts at Moody's Investors Service determined was a signal to lower their rating on several Dubai issuers ? they could no longer be sure the Government would bail them out. While this means lower credit ratings and higher borrowing costs, it does not mean that Dubai World will or will not repay other debts or that other Dubai borrowers will ask for delays on their debts. One source of uncertainty stems from the fact that the Dubai Financial Support Fund has divulged no details on its criteria for providing emergency funding or to whom it has provided that funding. Greater transparency on this score would undoubtedly have helped to avert the current confusion and avoid even more going forward. Another more dangerous misconception is that if Dubai World misses the December 14 Nakheel payment, banks to which it owes money will suffer a debilitating blow. Most of the banks that lent Dubai World money most likely started provisioning against it at the height of the crisis earlier this year. The same goes for owners of Nakheel's bonds. Many of them undoubtedly bought those bonds when they were selling at steep discounts and are even now sitting on profits. Another puzzler is the worry that Dubai's move stands to trigger a crisis among other sovereign borrowers in emerging markets. But Dubai does not pose a sovereign risk the way Latvia poses a sovereign risk. Dubai is more like California: if and when it runs out of money, it cannot print more. That means there is less risk that if Dubai could not afford to pay its debts, it would undermine the value of the dirham and spark a sudden outflow of capital. Much of the panic in global markets over Dubai seems to stem more from the timing of the announcement, which came during a long holiday weekend in the US. And with the year-end holidays approaching, analysts say investors were looking for a signal to take some of their money off the table. Dubai unwittingly gave them that excuse. warnold@thenational.ae