Plans to resolve the debt concerns of Dubai World are unlikely to translate into an immediate boost to Dubai's growth as imbalances in the property and banking sectors remain a drag on the economy. Concerns about the fresh debt Dubai will accumulate to repay creditors of the government-controlled conglomerate and the details of a potential sale of its assets also hang over the emirate's prospects.
"There won't be a sudden economic renaissance as structural problems in Dubai will still be there," said Dr Jarmo Kotilaine, the chief economist at NCB Capital, an investment company based in Riyadh. "The real estate crisis existed long before Dubai World and there's still an imbalance between demand and supply." The Dubai Government's announcement on Thursday of proposals to restructure US$23.5 billion (Dh86.31bn) linked to Dubai World and Nakheel was received positively by many investors and helped push local markets higher.
It ended four months of uncertainty caused by the unexpected announcement in November that Dubai World would seek to reschedule its debt. The proposals involve an injection of $9.5bn of new money into Dubai World, with the bulk coming from a loan previously made by the Abu Dhabi Government and $3.8bn from Dubai's own financial resources. The terms include repaying two sukuk, or Islamic bonds, issued by Nakheel and paying contractors to help finish previously delayed property projects.
"This is the first step to boosting confidence, but it does not mean that everything is hunky-dory in Dubai," said John Sfakianakis, the chief economist at Banque Saudi Fransi. "The economy of Dubai will continue to face difficulties this year due to downwards pressure on real estate, [and] a lack of foreign investment and consumer demand will have a dampening effect on growth sentiment." Any restart of stalled developments could hamper a recovery in the property sector by flooding the market with new properties, he added. Property prices in parts of the emirate have already fallen by up to 50 per cent from their 2008 high.
Mr Sfakianakis said uncertainties existed about the Dubai Government's strategy of bailing out Dubai World's corporate debt by increasing its own sovereign debt levels and potential losses through a sale of assets held by Dubai World. An adviser to the Government has said disposals of Dubai World assets could contribute to the funding. Banque Saudi Fransi is sticking to its forecast of negative growth in Dubai this year, with an expected 2 per cent expansion of the UAE economy driven by Abu Dhabi. A positive outcome of Dubai World's debt restructuring plans could prompt a revival in capital markets.
The cost of protecting the emirate's debt against default fell the most in three months following the announcement. Emirates NBD and Dubai Electricity and Water Authority are among borrowers that have said they may consider selling debt after Dubai World resolves its restructuring. "There are still problems in the banking system and debt capital markets are the most credible alternative to banks to raise money," said Dr Kotilaine.
Corporate lending remains restricted as banks seek to rebalance loan-to-deposit ratios. Loans still exceed deposits by Dh59.2bn. The Dubai Government's commitment to putting its conglomerate on a sound financial footing would help improve the outlook for the economy in the second half of the year and encourage the return of foreign investors to local markets, said Tudor Allin-Khan, the chief economist at HC Brokerage in Dubai.
"2010 will be better than expected," he said. "Consumption and energy usage will pick up as inflation is zero to 1 per cent and Dubai's population has not gone down." @Email:tarnold@thenational.ae