Dubai Faces ‘Debt Wall’ With Uncertain Support, Moody’s Says

Dubai faces a “pivotal year” in 2014 as the emirate tackles $20 billion of debt amid an unclear legal framework for restructurings and uncertain support from its richer neighbor, Moody’s Investors Service said.

“Little progress has been made on clarifying and strengthening the legal framework for insolvencies/debt restructuring, while details of the Dubai government’s capacity to support its government-related institutions remain uncertain,” Moody’s said in a report titled “Dubai Corporates: Modest Economic Growth Benefits Corporate Credit Quality, But 2014 Debt Wall Looms.” Next year “will be a pivotal year for Dubai as $20 billion of direct government debt related to Dubai World becomes due,” it said.

Dubai, which was on the brink of default in 2009 after a spending binge to turn itself into a trade and tourism hub, has about $17 billion of bonds and loans maturing in 2013 and 2014, according to data compiled by Bloomberg. Dubai’s neighbor Abu Dhabi and its banks probably won’t provide direct support to the city next year after the United Arab Emirates capital and the central bank rescued Dubai from the crash with a $20 billion dollar lifeline, according to Moody’s.

Budget Rationalization

Abu Dhabi’s potential reluctance to provide more support to Dubai could be due to its “budget rationalization process that affected public institutions as much as its core government-related institutions,” Moody’s said. “This has enforced stricter spending prudence for Abu Dhabi’s own economy and would in that context make additional support for Dubai’s corporates unlikely.”

The U.A.E.’s central bank in 2012 announced measures to cap lending to state-run companies after the bailout.

Investors have sought exposure to Dubai’s economic recovery after three state-related companies paid or refinanced $3.75 billion of debt in 2012, improving perceptions of the city’s credit risk. Dubai in January raised $1.25 billion in 10-year sukuk and its first 30-year bonds as it took advantage of tumbling borrowing costs.

The cost of insuring Dubai’s debt for five years, which receded more than peers last year, declined 8 basis points, or 0.08 percentage points, in 2013 to 217 on March 8, according to data provider CMA. That compares with a 22 basis-point decline for the cost of insuring Abu Dhabi’s debt for five years in the same time period, the data show.

Not Concerned

Gross domestic product in Dubai may grow more than 4 percent this year, according to Sami Al Qamzi, director general of Dubai Department of Economic Development. Figures for the first six months of 2012 point to growth of 4.1 percent for the full year, he said last month. The city isn’t concerned about refinancing outstanding debt, Sheikh Ahmed bin Saeed Al Maktoum, the head of Dubai’s Supreme Fiscal Policy, said in November.

Dubai is set to continue benefiting from “modest” growth of about 5 to 6 percent in G20 emerging economies as well as higher crude oil prices, Moody’s said. Gulf Arab oil exporters, including the U.A.E., supply about a fifth of the world’s oil.

More companies are expected to extend maturities on debt, diversify and seek medium-term refinancing after Dubai Electricity & Water Authority, the state-owned utility seeking funds to pay debt due this year, raised $1 billion, Moody’s said.

“It’s likely that Dubai will grow out of the problem,” Moody’s said. “We believe that the government of Dubai along with its Abu Dhabi lenders will find an amicable solution such as an extension of the debt so that it will not create any liquidity pressure on Dubai.”

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