September 09, 2009
Dubai Debt Analysis
Middle East Economic Digest has an interesting arty on the UAE/ Dubai debt problem, Dubai needs long-term plan to tackle the debt mountain which is worth a read and a comment (I had a little note The UAE Real Estate Ice Berg on this at Lounsbury).
Dubai's debts may be much more than people think and is set to enter a new phase. It now needs a long-term debt management strategy
A year since the bottom fell out of the credit markets, the legacy of boom-time borrowing continues to weigh heavily on Dubai.
But Dubai's debt struggle is about to enter a new phase. Nakheel, the government property firm, is due to repay a $3,500 million sukuk and other debts by the end 2009. The emirate's debt service burden rises still further in 2010 and 2011.
Nevertheless, the gloom that descended over Dubai's short-term prospects at the start of the year is lifting. The bond programme enjoys Abu Dhabi's implicit support. Oil has been above $70 a barrel since the start of August and is likely to stay there. Confidence is rising that Dubai will meet its immediate financial obligations.
I think that once it became clear that Abu Dhabi (smartly) was not going to let Dubai default (which certainly would have impacted the UAE badly overall), meeting short term obligations is less of an issue than long-term work out. But this is really the article's point:
People are now focusing on the long term. On 22 August, EFG-Hermes reported that Dubai's debts totaled $84bn, about 10 per cent more than most people had previously thought. This is about 150 per cent of Dubai's 2008 gross domestic product (GDP).
... But it was far lower than an estimate published earlier in the month by the Wall Street Journal which reported Dubai's debts could be $130-150bn. That would make them almost three times its likely 2009 GDP. It would also place Dubai in bad company. ... The difference between the EFG-Hermes debt number and higher figures from elsewhere is mainly attributed to borrowing by Dubai government-related entities that had not been previously made public. For example, Nakheel said in a filing on 31 July that Dubai World, the company's holding company, had almost $60bn liabilities. EFG-Hermes concedes its debt figure may not be complete.
I would lay good money on the EFG Hermes figure being incomplete and too low (adding up Gov tied/backed entities); I do not entirely trust EFG to be as aggressive in its adding up also.
Dubai's government is yet to release a definitive debt figure. But even if it is no more than EFG-Hermes' estimate, Dubai needs a new financial strategy. Before the crash, the plan was simple. Borrow short-term, sell land to developers and use the proceeds to pay off what was owed. But that approach won't work now and it may never work again.
Indeed, they also tried to make this work in markets outside of the Emirates control, e.g. in the Maghreb, where they ran into utter failure as banks were not willing to play that kind of speculative game with the kinds of leverage the Dubai and other Gulf entities wanted to use; effectively the Gulf property developers wanted to come in with near zero real equity relative to debt. The massive sums announced in papers was almost never there, in terms of capital brought to the table.
Dubai consequently faces a crushing short-tem debt service burden. According to EFG-Hermes, interest and principal combined will rise to more than $13bn in 2010 and to almost $20bn in 2011 before falling to $15,7m in 2012. That's at least 25 per cent of Dubai GDP each year.
This is indeed breath taking, and recall probably not the whole burden. Of course Dubai can access Abu Dhabi cash, so that makes it less horrible than if Dubai were a Singapore.
It is times like these when a lifeline would be handy. The start of the Iran-Iraq war made Dubai an attractive trans-shipment centre and Jebel Ali boomed as a result. The 2003 invasion of Iraq helped triple oil prices and increased the flow of goods and people through Dubai airport. Low interest rates fuelled demand for Dubai real estate. Something unexpected may turn up again. But it is difficult to see what that might be this time.
Taking this as a point of departure, I am quite sceptical that Dubai is really as well-positioned as its promoters think it is. It's business services reputation is also suffering as the weak points of its mediaeval bankruptcy laws are highlighted (as well as the unstable nature of the Visa Sponsor structure in bad economic times).
On the other hand, the massive over-investment in office real estate should cause rents to fall, making it easier to locate there on a cost-effective basis, in particular if Dubai reforms the cretinous bankruptcy practices and semi-modernises its visa system (probably only for 'professional categories').
Dubai's more responsible creditors have argued for years that it needs a coherent long-term debt management strategy. In the current circumstances, this would entail restructuring its debts over much longer periods. If the repayments were made over 25 years, it would cut the annual debt service burden to 2030 to under $10bn. This would still be more than 10 per cent of GDP in the next three years. But it would be less than half of what's needed in 2011 under the present debt service schedule.
The good part for Dubai in restructuring negotiations is simply the level of system stress; creditors are rather better incented to do a deal rather than risk something unpleasant on top of all the other unpleasantness. On the other hand, knowing Abu Dhabi is there will probably mitigate that. Those deep pockets are attractive, and getting the cash out quicker is better.
Borrowing is not always bad. Big debts are evidence of ambition and a spur to greater efficiency. Dubai is different to Zimbabwe and other countries at the top of the debt/GDP league in three key ways. It is part of one of the world's richest countries and the consensus is that Abu Dhabi will not allow the emirate to default. Dubai is still the best place in the region for business people to live because of its enormous oil and gas reservoir, and GCC GDP should at least double in less than a generation. Finally, Dubai is well run, even compared to the standards of some European countries.
A fair observation, but Dubai needs to get back to its old core value proposition of the early 00s, in being the place to do business because of the environment. That means, now that the boom years have exposed the unreformed legal system relative to corporate and personal insolvencies, and as well its charade of a land ownership program, getting back to bread and butter reforms. With Abu Dhabi financial life line they can probably do it.
A quick list of arties around the UAE Real Estate market and financial sector, as a laconic comment; one rather suspects UAE is hiding substantial insolvency of its RE and Financial sectors.
FT: Real estate: Are prices at the bottom?
FT: Dubai’s property market crumbles in crisis
FT: Malls still bustle but spending sprees have ended
FT: Banks - Fears over lack of transparency in region (This one amuses me given Dubai has been a corporate black box for the entire past decade)
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Some further points for consideration.
(1) Legal Infrastructure
When a country sets up an offshore economic zone (read DIFC) and advertises that this zone has its own comprehensive legal and regulatory system different from that onshore, that act speaks volumes about the state of the local regulatory and legal system. And one might not particularly flattering.
(2) Regulatory System
Similarly, when the distinguished expat (Philip Thorpe) selected to head the offshore regulator (DFSA) is abruptly dismissed and immediately removed from the country after criticizing apparent corruption, one might form an opinion about business practices in the country. When the topic that caused his abrupt departure is real estate that may suggest something about the practices in that sector.
(3) Financial Scandals
Beginning in early 2008, Dubai was rocked with scandals involving its financial sector including some locals who had difficulty distinguishing their money from the Sheikh's. An unfortunate mistake to make in a place like Dubai. Most of this involved real estate.
(4) Ponzi Scheme
For a long time now, the Govt of Dubai made a profit in each stage of the real estate development change. First, when it sold land to one of its government owned development companies. Second, when it sold the finished product to private buyers. At each stage largely government owned banks financed the development and purchase. In the latter stages providing Emiratis with finance so they could buy property on spec. Real estate prices went up in a merry spiral to rival what happened in the USA.
Posted by: Roger at September 9, 2009 06:23 PM
Indeed, viewing the real estate boom in Dubai as something approaching an ill-advised Ponzi scheme has much to recommend it. The only qualifier is that probably ... probably only ... the Dubai Sheikhal decision makers were taken in by their own Ponzi as it were (i.e. they believed the sales pitch themselves, due to their overall illiteracy).
Posted by: The Lounsbury at September 10, 2009 12:46 PM
I'd agree that they believed it.
But there are abundant examples from the imagined more advanced "West" where presumably sober investors and experienced institutions have been carried away by the rapture of irrational exuberance.
Some marquee name firms are no longer with us and some others are profoundly damaged by investing in what they should have known were junk investments.
And as to savvy individuals one financial titan saw the value of his Bear Stearns stock go from roughly $1bn to less than $50mm.
Posted by: Roger at September 10, 2009 02:33 PM
Istithmar suspends new investments.
May be sold or wound up?
Posted by: Roger at September 11, 2009 05:10 PM
Dubai really is in a world of hurt. I doubt that the other big Sov Funds in Gulf are actually better off. The rate at which the Maghreb projects are getting cancelled is impressive.
Posted by: The Lounsbury at September 14, 2009 10:58 AM
Lounsbury, what's your estimate of the chance that Suleiman al-Fahim's cheque for Portsmouth FC is actually going to clear? He was last heard of "refinancing in America", which sounds a lot like "desperately seeking buyer for unsaleable beyond-Dubai property investments".
Posted by: Alex at September 17, 2009 04:19 AM
I am not a betting man, but I suspect that he can find the liquidity by pledging Portsmouth FC revs, that sort of think. A Trump like deal where his name stays attached, but real ownership ends up elsewhere.
Posted by: The Lounsbury at September 17, 2009 04:34 AM
A lot of the investment projects in the Maghreb are by so-called "Islamic" banks and other private sector institutions.
As to GCC SWFs, here are sources of additional information. Note that most SWFs do not publish much in the way of financial info on their dealings. Norway is the exception.
So what follows is speculation - one hopes informed speculation.
Posted by: Roger at September 17, 2009 07:44 AM
And for some positive news
All things are relative - and spreads are still high but they've come down.
I find puzzling/laughable the comment that the opening of the very expensive Metro represents a factor improving Dubai's credit worthiness. But I was also skeptical about the real estate boom there.
Posted by: Roger at September 17, 2009 07:53 AM
Tamweel "corruption trial" news item.
Posted by: Roger at September 17, 2009 07:50 PM
Roger, thanks for the links. I need to look at them more closely, but on the Maghreb side we have not had that much of the Islamic funds / banks investing. Lots of sniffing, but not that much real activity. The Sovs and the quasi Sovs, they got to a lot of ground breakings that have ground to a halt. Really a fiasco for the Gulfies overall.
Posted by: The Lounsbury at September 18, 2009 10:59 AM
On reflection, I think I mis-stated the case for massive GCC private sector real estate investments.
I conflated North Africa with Maghreb proper.
For example, I remembered hearing Essam Janahi state that Gulf Finance House Bahrain had US$12bn in North African projects - but there's only about $6bn of that in Maghreb - $3bn Tunis Financial Harbour and roughly $3 bn in Morocco - Royal Ranches Marrakesh and Cap Malabata in Tangiers.
Posted by: Roger at September 19, 2009 08:46 AM