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Dubai CDS Conjure Pre-Lehman Spirits as Debts Paid: Arab Credit

Investor sentiment toward Dubai is about the best it has been since before the Persian Gulf emirate skirted default amid the global credit crisis.

The cost of insuring its debt against non-payment with credit-default swaps was quoted at 189 basis points at the end of last month, the least since the 187 reached in May, which was the lowest since the collapse of Lehman Brothers Holdings Inc., according to prices compiled by CMA. That compares with contracts on Turkey at 231 basis points and swaps on Abu Dhabi at 54, CMA prices show.

Dubai’s economy expanded about 4.9 percent in 2013, four years after it was rescued from near default with a $20 billion cash injection from neighboring Abu Dhabi. The stock market more than doubled last year, property prices are surging and companies including real-estate developer Nakheel PJSC are repaying debt early as they seek to regain investor confidence.

“The risk premium on Dubai continues to fall due to a continually strengthening fundamental picture,” Ghassan Chehayeb, a Dubai-based associate director at investment bank Exotix Ltd., said March 2 in e-mailed comments. Investors are more confident in “Dubai’s willingness and ability to honor its debt,” he said.

Average property prices in Dubai have gained about 40 percent in the last year, according to Cluttons data, with prices now less than 10 percent below their peak in August 2008, according to Jones Lang Lasalle. (JLL) Dubai’s benchmark stock index gained 22 percent this year, with its performance in 2013 the best among about 90 gauges tracked by Bloomberg.

Booming Dubai

“Dubai’s booming,” Farouk Soussa, head of Middle East economics at Citigroup Inc. in London, said in a Feb. 28 note to investors. “Dubai today is experiencing a real economic upswing and its resilience to exogenous shocks is much greater than in the lead up to the global financial crisis.”

Nakheel, which was at the center of Dubai’s debt crisis before being rescued by the government with a 16 billion-dirham ($4.4 billion) credit line, said last month that it repaid 2.35 billion dirhams more than a year-and-a-half ahead of schedule after delivering thousands of units to customers.

The government and state-linked companies are seeking to either pay or roll over about $30 billion of debt that matures this year, according to International Monetary Fund estimates. That figure includes the $20 billion from Abu Dhabi.

Market Bubbles

Still, concern is increasing that the property and stock market bubbles of 2008 may be repeated. BlackRock Frontiers Investment Trust Plc (BRFI), a $297 million fund run by the world’s biggest asset manager, said last month that it “substantially reduced” its holdings in the United Arab Emirates because of concern of increased speculation by retail investors.

Citigroup also sees parallels “with the property bubble that affected the emirate six years ago,” Soussa wrote. “As a small open economy, Dubai remains exposed to exogenous shocks, such as the impact of emerging market tapering or a potential hard landing in China,”

Contracts on Dubai climbed to 200 basis points yesterday as Russia’s threat to invade Ukraine prompted an emerging-market sell-off.

Dubai’s economic growth last year was the fastest since 2007, when it gained 18 percent. It may expand 4.7 percent this year, Mohamed Lahouel, chief economist for the Dubai Department of Economic Development said in February.

The emirate’s risk premium may fall further as it works through debt repayments and receives further investment after winning the right to host World Expo 2020, according to JPMorgan (JPM) Chase & Co. analyst Brahim Razgallah.

“Hosting the 2020 World Expo will be catalyst for deeper U.A.E. integration, in our view, which should reinforce the implicit support assumption in coming years,” he said.

To contact the reporter on this story: Stefania Bianchi in Dubai at sbianchi10@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net Claudia Maedler

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