Dubai economy back on track since the property bubble

Dubai has come a long way since the onset of the financial crisis and the past year has proved to be economically pivotal for all of the right reasons.

If there is a single phrase that can sum up last year for Dubai, it may well be "reinvigorated spirit". Since the end of 2008 Dubai has gone through the bursting of its property bubble and the debt restructuring of many of its high-profile Government Related Entities (GREs). The trigger was the onset of the global financial crisis in the autumn of 2008, but the cause was the excesses of the prior boom years that led to a speculative property bubble and excessive borrowing by some of the Dubai GREs.

Dubai has certainly come a long way since then, and last year has proven to be a pivotal year for all the right reasons. During the past 12 months, Dubai's GREs were able to meet all their 2012 bond maturities and complete the restructuring of the vast majority of their loans with international and local lenders; more than US$3.2 billion (Dh11.75bn) in bonds were fully repaid and more than $24.5bn in loans have been restructured with another $9bn still subject to negotiations.

During the same period there was a noticeable improvement in Dubai's economic fundamentals and a strengthening of its position as a regional transportation, logistics, services, and tourism hub.

Hotel occupancy in Dubai was in excess of 80 per cent throughout most of last year. Dubai's airport set new records for arrivals with 48 million passengers passing through in the first 10 months, while Jebel Ali port continued to record growth in container traffic that solidified its ranking as the ninth largest port globally and the largest by far in the Arab region.

Even the property market showed signs of a gradual and selective recovery, in spite of additional new supply, with villa prices on average rising by 20 per cent year-on-year through the end of September. According to the Dubai Department of Economic Development this new found vigour is expected to translate into GDP growth of 4.5 per cent for last year, and for this growth trend to continue.

So all-in-all, it has been indeed a good year that has reinvigorated the spirits of Dubai, restoring its confidence and validating the efficacy of the development process; a process which relied upon a great deal of debt but succeeded at establishing Dubai as the premier regional business and commerce hub.

Confidence in Dubai was also restored to international and regional investors who drove the yield on Dubai debt to post-financial crisis lows. Last year, Dubai only issued $1.25bn of new sukuk despite investors' strong appetite for this debt. The entirety of this debt offering was issued in May in the form of a five-year sukuk and a 10-year sukuk, which came out at yields of 4.9 per cent and 6.45 per cent and are currently yielding about 3 per cent and 4.25 per cent, respectively.

Investors' improved perception of Dubai and their willingness to take on more Dubai risk is also clearly manifested in the sharp decline of Dubai's credit default swap (CDS) spreads. Dubai's five-year CDS, which is the annual premium paid for five years to insure against a debt default, is currently about 225 basis points or 2.25 per cent of the insured amount, down from 4.5 per cent at the beginning of the year.

This is not to say that Dubai has overcome all of its debt problems. The emirate and its GREs still have a challenging debt maturity profile with over $48bn of debt coming due between 2014 and 2016. This includes some restructured debt as well as the $20bn provided by the UAE Central Bank to Dubai as part of the post-crisis support facility, which is expected to roll-over.

Nonetheless, given the lumpy nature of Dubai's debt maturity profile and the markets' current willingness to take on Dubai debt as reflected by the relatively low yields on that debt, it would be advisable for both the emirate and its GREs to seize this moment in order to alleviate the pressures of the heavy maturity burden of 2014-2016.

This can be done by issuing longer-dated bonds that would extend the maturity profile beyond 2016 as well as stagger these maturities across several years. The proceeds of these issues may be used in the early retirement of some debt, mainly bank loans, or held in reserve against future maturities.

This would not only leverage the current willingness to lend to Dubai at relatively low yields, but also Dubai's solid economic footing and the prospects of its sustainable GDP growth which is expected to average, according to Standard Charted Bank, 3-5 per cent per annum up until 2020.

So, while last year was supposed to be a nail-biter for Dubai from a refinancing standpoint with closely watched large debt maturities and restructurings, it ended up being a non-event with debt markets opening up for Dubai and the GRE's meeting or successfully restructuring their obligations.

This year, which has few debt maturities, is likely to be a year of strong issuance with the availability of financing at relatively low rates and the need to stagger Dubai's debt maturities over a longer time horizon.

Yaser Abushaban is the head of asset management at Emirates Investment Bank.