IMF Says Dubai Debt Fallout Contained, Events Still Unfolding
IMF Survey online
December 4, 2009
- Central bank actions, debt restructuring announcements have calmed markets
- Direct financial effect contained, but indirect effects still unfolding
- Likely impact on future risk assessments of quasi-sovereign commercial entities
Following Dubai’s jolting announcement on November 25 that it would seek a standstill on the debt of Dubai World, the emirate’s flagship holding company, the government has taken several steps to contain the fallout. But the event still has significant implications for the region, says IMF Middle East and Central Asia Department Director Masood Ahmed.
“The Central Bank’s announcement on November 29 to introduce a supplementary liquidity facility and to reaffirm that it stands behind banks in the United Arab Emirates has been very helpful, especially because these banks hold some of the Dubai World and the Dubai Government debt,” Ahmed said in a conference call with press.
Ahmed told reporters that Dubai World’s announcement to initiate a constructive engagement with its creditors and clarify the size and scope of the debt to be restructured had helped to reduce market uncertainty. In the November 30 statement, the company announced that it would restructure debt amounting to $26 billion—$6 billion of which is related to Nakheel, Dubai World’s real estate subsidiary.
The announcement specified that the restructuring process would not include non-real estate corporations such as Infinity World Holding, Istithmar World, and Ports & Free Zone World (which includes DP World, Economic Zones World, P&O Ferries, and Jebel Ali Free Zone).
Dubai World also indicated on December 1 that it would strive for equitable treatment of creditors—a move that Ahmed said was expected to have a positive impact on the markets.
But the debt restructuring process “now needs to be taken forward,” Ahmed stressed. “Engagement and communications with creditors and investors will be critical to ensure an orderly and timely solution.”
While it is too early to assess the implications of the Dubai World’s fallout, it is very likely that the recovery of Dubai’s economy will slow down, resulting in another year of slight contraction in the non-oil GDP. Nevertheless, the UAE as a whole is expected to still register positive growth in 2010, albeit below the 3 percent pre-crisis forecast.
According to a preliminary IMF assessment, Dubai’s global trade and services engine is poised to recover with global growth, particularly in Asia. However, its property sector—the chief source of the emirate’s recent boom—will take longer to bounce back, because of the following factors:
• dented confidence and lowered reputation will affect equity valuations, risk premia, and access to international markets;
• credit conditions will be more restrictive as a result of increased risk aversion; and
• financial losses from restructured obligations will impact corporate and household balance sheets
While the direct financial effects on international banks appear to be contained, the exact implications of the event depend on how large a role the following variables play:
• perceptions of risk in the Gulf Cooperation Council countries and quasi-sovereign debt markets;
• the potential sales of some Dubai World assets and consequent reevaluations of certain asset classes globally, especially commercial property; and
• the handling of Dubai World’s debt restructuring and the effect on investment flows into and from the UAE
Ahmed stressed that the event could have some repercussions on the region, through nonfinancial channels, including foreign direct investment, trade, remittances, and sells-offs of Dubai World assets, but there is considerable uncertainty around the scope and magnitude of these effects as the event is still unfolding. Moreover, the impact would be muted because of recovery and growth in the region as a whole.
More broadly, Ahmed emphasized that the event is likely to have an impact on future risk assessments of quasi-sovereign entities—as well as the degree of transparency that investors demand.
“Investors will start to look more carefully at implicit guarantees. There will be also a broader reassessment of quasi-sovereign commercial risks,” he said, stressing that transparency and the timely provision of informative data on quasi-sovereign commercial entities would be crucial for such corporations’ access to international investors.
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