Maybe the sky is not falling after all. It seems that the fears of global investors over Dubai's debt have eased. After reaching an 11-month high last month, the spreads on credit default swaps (CDS) for Dubai debt have narrowed sharply this week. The cost of insuring US$10,000 worth of Dubai Government debt closed at $512 yesterday, according to Bloomberg data. As recently as February 15, it was at $651, a decline of more than 20 per cent in roughly two weeks.
The price of a CDS is an indicator of investor sentiment about the likelihood that the bond issuer will default. The recent movement was due in part to easing worries about the ongoing problems in the euro zone and other troubles brewing around the globe. But there are also indications that the investment bank Nomura was on the money when it characterised Dubai's risk of default as "exaggerated". "Despite the deterioration in the outlook for Dubai, the flush state of UAE finances at the federal level means the risk of default on sovereign debt is limited," Ann Wyman, a New York-based analyst with Nomura, said in a report issued this week.
The bank measures countries according to what it calls a "fiscal sustainability scorecard", which considers factors including debt levels, GDP and vulnerability to interest rate shocks. According to that scorecard, the UAE is actually second only to New Zealand in terms of stability among the 33 countries included. The cost of credit default swaps for Abu Dhabi debt also dropped this week, closing yesterday at $125 to insure $10,000, a slide of 30 per cent in the past month. "Looking at Abu Dhabi's credit risk versus that of some other emerging markets like Poland, Mexico or Brazil, it seems like markets are pricing in too high a probability of default," Ms Wyman told The National.
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