Dubai Refinances $20 Billion at Below Nation Inflation Rate

Dubai, the emirate that had debt maturing this year equivalent to a third of its economy, refinanced $20 billion at a quarter of the original cost, freeing cash to service liabilities and fund expansion plans.

The sheikhdom rolled over $10 billion of bonds owed to the central bank and a loan of the same amount due to Abu Dhabi’s government, and will pay a fixed interest of 1 percent on both, according to a statement on state-run WAM news agency yesterday. The rate is less than the United Arab Emirates’ 1.1 percent inflation for 2013, and half the inflation rate forecast for this year. The new debts are renewable after five years.

Dubai and its state-owned companies borrowed more than $110 billion developing the real-estate industry and transforming the sheikhdom into a tourism and financial-services hub. The emirate, which announced plans to spend $8 billion gearing up to host the World Expo in 2020, faced $30 billion of maturities in 2014, according to International Monetary Fund estimates before yesterday’s deal.

“Now that they have refinanced a chunk of what’s due this year, the remainder suddenly looks much more manageable,” Khatija Haque, Emirates NBD PJSC’s Dubai-based head of research for the Middle East and North Africa, said in a telephone interview yesterday. “The interest rate is lower than we anticipated.”

Accelerating Growth

The 1 percent rate is about 50 basis points less than the U.S. government pays on similar maturity debt. The sheikhdom originally borrowed the cash from its oil-rich neighbor and the U.A.E. central bank at 4 percent to help Dubai state-controlled companies through the global credit crisis. Both bonds were due to mature this year. Dubai’s benchmark index gained as much as 1.3 percent today before paring the gains to 1.2 percent at 12:13 p.m. in Dubai.

The agreement “should have a positive impact on lowering the cost of funding for Dubai and improving its credit worthiness,” Yaser Abushaban, executive director for asset management at Dubai-based Emirates Investment Bank PJSC, said by telephone yesterday. “It can now service its debt more comfortably.”

Dubai’s cost of borrowing has tumbled since the financial crisis. The emirate sold $1.25 billion of five-year Islamic bonds in 2009 priced to yield 6.396 percent, according to data compiled by Bloomberg. Last year it raised $750 million in 10-year sukuk at 3.875 percent.

The economy expanded 4.9 percent in 2013, the fastest pace since 2007 when it soared 18 percent. The cost of insuring Dubai’s debt against default was 200 basis points March 14, almost a fifth of the February 2009 figure, when concern over the emirate’s ability to repay its debts soared, according to prices compiled by CMA. Dubai’s inflation rate may double toward 5 percent by year end as property prices and rents rise, HSBC Bank Middle East Ltd.’s Chief Economist Simon Williams said in an e-mailed report today.

Prices for mid-range apartments in Dubai rose 43 percent in 2013, according to Cluttons LLC data on Bloomberg, after values more than halved following the global financial crisis in 2008. Emaar Properties PJSC, developer of the world’s tallest tower, said revenue from apartment sales jumped 43 percent to 3.6 billion dirhams ($980 million) in 2013, while revenue from villa sales climbed 42 percent.

The agreements announced yesterday are part of “efforts to boost the competitiveness of the U.A.E. economy on both regional and international levels, and to reflect the upturns Dubai domestic economy has witnessed over the past few years,” according to the statement. “Signing of these agreements is consistent with the U.A.E.’s prudent financial policy which aims at supporting and promoting economic growth.”

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