The cost of default insurance on Dubai debt has fallen to its lowest level in almost a year, reflecting growing confidence in the budding economic recovery after the emirate raised US$1.25 billion (Dh4.59bn) from investors late last month. "The current level means the outlook for Dubai is definitely improving," said Saad al Chalabi, an institutional trader at AlRamz Securities in Abu Dhabi. "The risk appetite is increasing and we are seeing massive foreign participation and expect more of it."
Investors and analysts have watched closely as credit default swaps (CDS), which measure investor perceptions of the risk that a company or government will fail to meet its financial obligations, rose when the financial crisis deflated the emirate's property bubble last year. Dubai World, the conglomerate that owns the ports operator DP World and the developer Nakheel, sent CDS levels soaring even higher after announcing in November that it would seek a standstill on debt repayments and begin to negotiate a restructuring.
With the $24.9bn Dubai World debt deal nearly behind it - about 99 per cent of the company's bank creditors recently signed on - analysts say Dubai is gradually extricating itself from the tangle of the crisis. Nakheel, a developer owned by Dubai World, is also making headway in renegotiating obligations to contractors and creditors, and has recently resumed construction on a number of its stalled projects.
"There's been quite a bit of good news in the sense you had the Dubai World transaction completed, Nakheel being in its last stages of completion, making payments and restarting projects," said Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai. "There's a lot of positive noise around Dubai, but you have to keep that in context of the fact that we're in a very strong bull market in the short term. Right now things are very strong and there is a lot of liquidity for emerging-market debt."
The bond Dubai launched last month attracted strong interest from investors seeking higher returns from emerging-market debt, with buyers placing about $5bn of orders for a two-part bond of $1.25bn. Other companies - Emaar Properties and the Dubai Electricity and Water Authority among them - are using improved sentiment about Dubai as a springboard for their own bond sales. The emirate received a further boost when Dubai Islamic Bank took a controlling stake last month in Tamweel, one of the emirate's two big Islamic mortgage companies. That step brought new clarity to the fate of a listed company, the shares of which were excluded from trading for nearly two years, as a government panel contemplated a merger with Amlak Finance, the other big mortgage company.
The interest rate that banks pay when they borrow from each other is also falling, a tentative sign that bank lending may be picking up. The three-month Emirates interbank offered rate (Eibor) fell yesterday to 2.25 per cent, a seven-month low. Against that backdrop, local stock markets have rallied as CDS prices dipped below the 400 basis-point level this week for the first time since Dubai World's debt standstill announcement last year. They had risen to above 600 basis points during the months of uncertainty that followed the start of the debt talks.
A basis point is one one-hundredth of a percentage point. Higher CDS prices mean investors must pay more for contracts that insure against default, an indication that risk is perceived as greater. "We have been watching the 400 level for a very long time, and when it broke 400 it was quite significant," Mr al Chalabi said. "We maintain a very net positive scenario for the market, at least for the remaining quarter. There is still some concern on the third-quarter earnings, but nothing significant."
Serious strains remain, however. Officials have yet to announce plans to rescue Amlak Finance after its planned merger with Tamweel was called off last month. Divisions of Dubai Holding, a conglomerate owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, continue to explore debt restructurings. And property prices, already down by as much as half last year, may fall further, according to a report from Jones Lang LaSalle this week.
"All sectors of the Dubai market remain in the downturn phase of the cycle, with the likelihood of continued falls in average prices and rentals over the rest of 2010," the property consultancy said. afitch@thenational.ae halsayegh@thenational.ae
