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Dubai may be as indebted as South Africa if S&P proves right

Country’s debt is on the rise as the government taps the bond market.
The Burj Khalifa skyscraper, centre, stands above other skyscrapers on the city skyline, seen from Dubai Creek Harbour Development in Dubai. Image: Bloomberg

Determining how much debt Dubai’s government has amassed depends on who’s counting. What is less in dispute is that the uncertainty comes at a cost.

Unlike the government, Moody’s Investors Service and S&P Global Ratings include Dubai’s local bank borrowings to make the calculation, arriving at an estimate of about 290 billion dirhams ($79 billion). The debt burden could equal 77% of this year’s gross domestic product, according to S&P, comparable with what the International Monetary Fund predicts for South Africa and just behind Oman.

However, in the prospectus for its $2 billion bond sale this month, Dubai put its debt at 123.5 billion dirhams, a figure that leaves out what’s owed by the emirate’s government-related entities, or GREs.

“Moody’s and S&P are taking a broader and more conservative approach,” said Todd Schubert, Singapore-based head of fixed-income research at Bank of Singapore. “As investors, we certainly pay attention to what the rating companies think as we realise that other investors incorporate their views into their evaluations of the credit.”

Dubai’s Department of Finance declined to comment.

The discrepancy alone may not capture the extent of risks that might lurk off the balance sheet of the city, the second-wealthiest of the seven sheikhdoms that comprise the United Arab Emirates.

Most of Dubai’s GRE debt is issued by private and unrated entities, so there’s “limited visibility” over their financial performance, according to Thaddeus Best, a Dubai-based analyst at Moody’s. On top of the government’s own liabilities, Moody’s “conservatively” estimates the emirate’s non-financial public sector debt at $83 billion.

All of the state-related firms that Moody’s rates — including utility monopoly Dewa, port operator DP World and Emaar Properties PJSC — are investment grade, indicating a low probability of distress, he said.

“However, these issuers represent only a minority of the outstanding stock of GRE debt,” Best said.

More than a decade ago, Dubai stunned global markets by announcing that state-owned Dubai World would seek to delay debt repayments. Having already tapped the UAE central bank for funds, the city then sought the help of its wealthier neighbour, Abu Dhabi, to avert a default by developer Nakheel PJSC.

By drawing the line around what Dubai considers its direct liabilities, the government is sending a message that it won’t be held responsible for other debt, said Nasser Saidi, who worked as chief economist of the Dubai International Financial Centre during the city’s debt crisis. By contrast, rating companies have to adopt the view of an external investor, which means taking all liabilities into account.

“Creditors will always try to claim the sovereign guarantee,” he said. “Claiming under a sovereign guarantee is less costly and potentially less protracted than trying to claim against companies.”

When it comes to borrowings from commercial banks, Saidi said some of the money may be offset by government deposits, since there is usually a working relationship between authorities and lenders. Dubai’s biggest bank, Emirates NBD PJSC, reported its aggregated sovereign loan exposure at almost 162 billion dirhams as of June 30.

The lesson of Dubai’s brush with default in 2009 is that creditors failed to show the government’s guarantee, but the risk of spillover and damage to the creditworthiness of the UAE as a whole prompted Abu Dhabi to intervene, Saidi said. Dubai has since set up a public debt office to monitor the borrowings of the GREs, especially their foreign-currency liabilities.

Although the coronavirus pandemic and global recession have revived concerns about Dubai’s debt burden, the government’s ability to raise money this year has put markets at ease.

Investors are pricing in less than a 20% risk of stress, with the gap in the yields between Dubai and Abu Dhabi’s bonds maturing in about 10 years at about 105 basis points, Jaiparan Khurana, a London-based strategist at Morgan Stanley, said in a report. It was as wide as 360 basis points from 2010 to 2012, when “Dubai Inc. was facing financial stress,” he said.

While Dubai isn’t rated by any of the three major credit assessors, their bigger estimate of its debt means the emirate faces higher borrowing costs. Morgan Stanley said Dubai’s bond yield curve should trade wider than the other six UAE sheikhdoms because of its “high public-sector leverage.”

The close ties between the emirate and its government-related entities demand a different approach from investors, according to Sergey Dergachev, a money manager in Frankfurt at Union Investment Privatfonds GmbH who didn’t participate in Dubai’s most recent foreign debt sale.

“Dubai’s case is very complex since you really need to understand the cultural dimension,” he said. It’s also important “to detect which parts of GRE companies are weaker, and which are systemically important.”

© 2020 Bloomberg

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Why this comparison? Dubai is a city in country of UAE.

Saffa is a country in Saffa.

Lets go back tot he article. Dubai has more debt than Saffa.
Is this the joke of the day?

Many countries have debt than South Africa, here are some debt to GDP:
USA – breached 100%
Brazil – 87%
Italy – 140%
Japan over 200%
India – 75%

All countries have very high debt levels, the period 2007 to today period, has been one of deficits, SA is not alone at this… we just dont have a common vision on how to solve growth…

I have always found it interesting that Third World countries are held to a different standard than First World countries. TWC are always told to maintain fiscal responsibility while FWC sit at 100% or above of GDP. It is absurd. The game rigged.

The Question is not how much debt to GDP a country has, the question is what is the borrowing interest rate of that debt. USA with 100% plus debt borrowing rate is much lower than the 80 odd % GDP/Debt ratio which South Africa have to borrow at. This is why Junk Status is so important not to have. If we were better rated by Moody’s etc, we could have the current debt level, but actually afford it. With the current status, we can’t afford the debt, from there the issue. So unfortunately most third world countries sit with the same problem – the interest of borrowing for them is much higher than that of healthy first world countries.

Dubai just needs a loan from their friends, the Guptas

Yep, the disGuptas can help them with all the money they stole from South Africa’s poor. So hope the noose is slowly tightening around these people, along with the Zuma faction that enabled them. With the help of the so-called Zuma Foundation – a cover for Ace Magashule and his henchmen – the crooks in the ANC are STILL desperately trying to avoid being fitted for orange overalls, while currently grabbing as much as they can from our depleted taxes.

End of comments.

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