Transcript

Transcript of a conference call on Dubai by Masood Ahmed, Director of Middle East and Central Asia Department, IMF

December 2, 2009

Good morning, everybody. My name is Olga Stankova, and I’m in Media Relations of the International Monetary Fund. Welcome to the conference call on Dubai. The conference call will be held by Masood Ahmed, Director of the IMF Middle East and Central Asia Department. I would like to let you know at the outset that the conference call will be embargoed until 11:00 a.m. Eastern time. At this time, I will pass the microphone on to Mr. Ahmed.

MR. AHMED: Good morning. Thank you all for joining, and I thought from our point of view it would be useful to have a conference call just to give you a little sense of where we are in our own analysis of the event in Dubai, emanating from the debt stance announcement Wednesday before Thanksgiving.

Obviously, the situation is still unfolding. The follow-up needs to be worked out. At this stage, our assessment is preliminary, but probably useful to share it with you anyway, and happy to try and answer any questions that you have that we can today.

As you can also imagine, we have been working on it since the announcement. We have formed in the IMF a cross departmental working group which has been looking at the impact both within the UAE and on other economies after the initial announcement.

Now, in terms of our assessment of where things are, obviously we started off with an announcement that came as unexpected and surprised markets, generated strong reactions. But, since then, we do think that subsequent announcements have helped to reduce market uncertainty. And amongst these, first, the central bank’s announcement on Sunday the 29th to introduce a supplementary liquidity facility and to reaffirm that it stands behind the bank in the UAE in our view has been very helpful, especially because many of these banks do hold debt of Dubai World and, more generally, of the Dubai government.

Secondly, Dubai World announcements on Monday, initiating a constructive engagement with its creditors, clarifying the size and scope of the debt that will be restructured, were also very informative. We now understand much more clearly, as do investors, that the debt is question is about $26 billion and that the process of restructuring will not include a number of the corporations that are subsidiaries of Dubai World, and so it’s helped to put boundaries around the amount and the scope of the debt restructuring.

And finally, yesterday, as some of you will have followed, Dubai World indicated that it would strive for equitable treatment of stakeholders, and we think that this is also going to have a positive impact on markets and on investors. In our view, this now needs to be taken forward to further clarify any questions relating to the nature and scope of the restructuring process, and we do believe that continuous engagement and communications with creditors and investors will be critical to ensure an orderly and timely solution.

So what is our preliminary take on the potential impact of these events? And again, just to put in the caveat that this is early in the process, but still our current assessment is, first of all, if you look at what is happening within the UAE, well, the obvious impact will be that particularly in Dubai this event will hold back the economic activity over the coming year. Dubai, of course, is more than Dubai World. Dubai has a trade engine, it has a global services function, and these are poised to recover with the global recovery, particularly in Asia. But it also has a substantial property dimension to its economy, and that will take longer to recover.

We do think that this event, because it has dented confidence, could lead to higher credit borrowing costs, and also the process of looking at losses that might accrue from restructured obligations will impact household and corporate balance sheets.

Our assessment of the recovery and projected rates of growth in the UAE, more broadly now, has been that after a slowdown from close to 9 percent of average annual growth rate in the non-oil GDP of the UAE between 2005 and 2008, this year, 2009, the growth had slowed down to close to 0, between 0 and 1 percent, and we had anticipated that next year, 2010, the non-oil GDP growth rate in the UAE would pick up again to about 3 percent -- still not what it had been over the previous years, but certainly better than this year.

Now, after this event, we think that because Dubai, which accounts for about 40 percent or so of the GDP of the UAE, Dubai will be slowed down in its recovery. We think that overall UAE recovery will also be more muted, and we’re probably looking at a growth rate that’s going to be significantly lower than 3 percent, although it will probably be better than what it’s done this year. And that’s something that we will be working on in the coming weeks.

Now, going beyond the UAE, the other question, of course, has been the contagion effect and the impact of this event on neighboring markets, markets in the region, markets more broadly. I think what we’re beginning to see today and over the last couple of days is after the initial reaction, markets are beginning to distinguish between the idiosyncratic risk of Dubai versus that of both the GCC countries and also markets outside. You are beginning to see already that CDS spreads are coming back down after, in the case of Dubai, for example, they pretty much doubled from a little over 300 before the event, to a peak of 670 or so. They’re now down to about 450 gross today. Similarly, in the neighboring countries, in the GCC, you see a tightening of CDS spreads, and you also begin to see some stabilization in equity markets, and also the broader effect on emerging markets in terms of CDS spreads seems to be getting digested.

Now, beyond that, the direct financial effects on international banks also appear to be contained, from all the information that we have seen. I should say that there are still some questions that will need to be worked out in terms of some of the more indirect effects, perhaps as Dubai World disinvests some of its assets externally, as Dubai World also postpones or delays some projects that it had internationally on the books. These effects still need to work through, and some of that will affect the neighboring countries.

There are also some real sector effects that might flow from a slowdown in the economy of Dubai and the UAE, on neighboring countries. As you know, there are strong links through investment, through remittances across, between the UAE which has about $10 billion worth of remittances going out through the region. So there might be some effect on those. But at this stage it’s both too early to tell, and I think it’s important to recognize that while there may be a slowing down in Dubai, Abu Dhabi continues to grow rapidly, as do other countries in the GCC. So the net effect in terms of remittances out of the region may not be as large.

The final point I’d make is that we do think that one of the lessons that will be drawn from this will be that investors will start to look much more carefully at the issue of implicit guarantee, and there will be a broader reassessment of quasi-sovereign commercial risk, and there will be a higher premium, we believe, on transparency and timely provision of financial data on quasi-sovereign commercial entities, for these corporation to be able to act as financing on attractive terms in the future.

So that’s roughly where we stand. As I said, this is a preliminary assessment now. We’re continuing to work on it as events unfold, as the process of restricting of Dubai World and of Nakheel continues, and as the broader implications become clearer.

I will be happy to come back and do another update for you if you think that would be useful, in a week or so. But in the meantime if you do have any questions, I’d be happy to pick up on them now. Thank you.

QUESTIONER: Yes, hello. I just had a few questions. So you said you established this workforce, this task force as soon as the news broke. When did you first establish contact with them, with the UAE? Did you find it difficult to reach out to them or not?

And from what you say, I mean just to confirm, this is no longer the kind of situation that the UAE could come to you for a loan, is it?

MR. AHMED: Thank you very much. So there are two questions that you raise.

On the first one, no, we’ve had no difficulties establishing contact with them. We continue to have good relations and good contacts with the authorities in the UAE, and that’s certainly been the case, and that’s really what has facilitated the work that we’ve been able to do in our efforts.

I should also just mention to you that we do have an annual Article IV process as well, and that’s something that has been underway. So we do have continuing contacts.

As to your second question, no, we do not anticipate that there is any need or any kind of financial support from the IMF in this case because, of course, this is commercial. We’re talking about a commercial restructuring.

Secondly, when you look at the UAE as a whole, which is the national entity that is a member of the IMF, the resources available to the UAE are such that it can easily deal with these issues from those resources and doesn’t, in our view, see any reason to come to the IMF for any kind of assistance. That doesn’t stop, of course, the IMF from offering advice and support in other ways, which we continue to do.

QUESTIONER: I was wondering if you could elaborate a little bit more about any concern that you have on the broader risks of what has gone on in Dubai. I mean you mentioned a premium on transparency. Do you see any risks from commercial real estate development generally in the region coming out of this, or anything broader, and what about impact on banks and international investors that obviously are exposed to Dubai?

MR. AHMED: There are three points. One is that insofar as the direct financial effects on banks that have lent money to Dubai World, from what we’ve been able to establish, we think these effects are contained and manageable. We don’t see that that’s going to be an issue.

There is a question of banks from within the UAE and the region. As for the UAE banks, as you know, the central bank has come out and the Fed, that they stand behind the banks, and we think that already provides a degree of support. So, again, we think those effects will be manageable.

Secondly, what about other kinds of effects? Well, as I mentioned, Dubai World does have assets abroad doing commercial real estate. But, more broadly, it has assets abroad, and it may well be that some of these assets will be disposed of, and that process will need to work its way through.

It may lead to some degree of revaluation of commercial property more generally, which is sort of broader than an issue for debate, but at this stage I don’t really see, I don’t have a lot more to say on that.

I think the other issue is that when I mentioned the question of transparency and a premium on financial data, as one of the issues in this particular event, of course, has been that some of the lenders may have been providing financing, assuming that there was an implicit guarantee, and this will help to clarify the fact that a number of these corporations, which are commercial corporations owned by governments or by sovereigns, do not enjoy the kind of implicit guarantee in the future.

If that’s the case, then of course the lending will have -- their borrowing will need to be based on their own fundamentals, their own financial situation, and so information about those fundamentals, about their assets and their liabilities and about their cash flow, will become more important in the determination that investors and lenders will make in terms of how much financing they’re willing to provide, and on what terms. So we do think that will put a higher premium on having that information available, to be able to attract financing on more attractive terms.

QUESTIONER: And can I just go through the figure that you gave earlier? You didn’t see growth -- previously, your forecast for growth next year was -- was it 9 percent?

MR. AHMED: Just to give you that figure and make sure that everybody else, in case there’s any ambiguity about it, what I’m saying is that non-oil growth -- so just to be clear that I’m talking about non-oil GDP growth because in all of these economies the overall GDP growth rate is determined a lot by oil production, and in a way we think that non-oil GDP is a better measure of the level of economic activity.

So, non-oil GDP growth in the UAE as a whole had averaged close to 9 percent between 2005 and 2008. This year, 2009, of course with the slowdown that had come from both the slowdown coming from lower oil prices into the rest of the economy, feeding through, from slowdown in the global economy which affected trade and also the impact of the collapse of assets prices, including real estate prices particular in Dubai, which had had a big impact on economic activity in Dubai and therefore in the rest of the UAE, this year the growth rate has dropped to close to 1 percent, between 0 and 1 percent for this year.

Now, going forward, next year, we had been anticipating a pickup in economic activity to about 3 percent, again quoting non-oil GDP growth in the UAE as a whole. So we’ve begun to see some stabilization in property markets, some stabilization and some recovery in trade and services as the rest of the world, and particularly Asia, began to recover.

And what I’m saying is that now we’ll be in the process of looking at, reexamining that projection for next year. Our anticipation is that there will be a significant reduction in that growth rate, down from 3 percent, probably somewhere between this year, so the 1 percent number, and 3 percent for next year. We don’t have an exact number yet, but certainly we do see a knockoff from the projection of 3 percent as slowdown in Dubai holds back growth in the rest of the economy.

QUESTIONER: I’m sorry, I just wanted to clarify one thing. When you said that, when you mentioned the crisis has been contained and manageable, that was in answer to the impact for banks or was that true as a general statement?

And then secondly, I just wanted to check with you as to what are you recommending on Dubai at the moment when you talk with them.

MR. AHMED: I mean on your first point, just to say what I was responding to was very specifically at that point to Lesley’s question, which is the impact on the banks that had been lending was manageable.

However, as I said at the beginning, we also believe that after the initial reaction on Thursday, if you look at how markets are looking at and after the clarity that has been provided on the scope of debt, on the size of the amount of debt that is in question, that the reaction from markets and investors shows that whole event itself is now much more digested by markets and is more contained and manageable itself. So, in terms of the spillover and the contagion effect to the rest of the region, they’re now much more muted. In terms of looking at financial markets more broadly, they have also digested this event. So, yes, the broader, in the broader sense also, we do think that this is a more manageable and contained event.

That doesn’t mean to say that there isn’t work to be done to deal with it, and that sort of essentially gets to the kind of advice or issues that we see going forward. And I think the points again are the ones that I stressed before, which is in the short run that it’s important to follow through with the process of the restructuring through engagement with creditors, to ensure equitable treatment for all creditors and to do so with continuous communication. That will help to give people clarity on both what is the amounts of debt concerned, and the nature of debt, and also how the process will evolve. I think that will be one element of it.

And beyond that, of course, there will be a question of looking at what the consequences of this event will be in terms of the development strategy for Dubai and for the UAE, going forward, but that’s a little way down the road.