IMF Survey: IMF Says Dubai Debt Fallout Contained, Events Still Unfolding

IMF News, December 4, 2009

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Event timeline:
- Dubai announced it would seek a standstill on the debt of Dubai World on November 25.
- The Central Bank announced a supplementary liquidity facility and reaffirmed it stands behind banks in the United Arab Emirates on November 29.
- Dubai World announced it would restructure debt amounting to $26 billion in a November 30 statement.
- Dubai World indicated on December 1 that it would strive for equitable treatment of creditors.
Key containment actions:
- Central Bank’s supplementary liquidity facility and public support for UAE banks helped calm markets, especially because these banks hold some Dubai World and Dubai Government debt.
- Dubai World’s engagement with creditors and clarification of the size and scope of debt to be restructured reduced market uncertainty.
IMF emphasis:
- “Engagement and communications with creditors and investors will be critical to ensure an orderly and timely solution.”
- “The debt restructuring process now needs to be taken forward.”

Total restructured debt announced: $26 billion.
Real estate component: $6 billion related to Nakheel, Dubai World’s real estate subsidiary.
Exclusions from restructuring process:
- 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) were specified as not included.
Market signaling:
- Commitment to equitable treatment of creditors expected to have a positive impact on markets.

Short-term growth outlook:
- Recovery of Dubai’s economy is very likely to slow down, resulting in another year of slight contraction in the non-oil GDP.
- The UAE as a whole is expected to still register positive growth in 2010, albeit below the 3 percent pre-crisis forecast.
Sectoral outlook:
- Global trade and services: poised to recover with global growth, particularly in Asia.
- Property sector: expected to take longer to bounce back due to:
- dented confidence and lowered reputation affecting equity valuations, risk premia, and access to international markets;
- more restrictive credit conditions as a result of increased risk aversion;
- financial losses from restructured obligations impacting corporate and household balance sheets.

Direct financial effects:
- Direct financial effects on international banks appear to be contained.
Key variables determining broader implications:
- perceptions of risk in the Gulf Cooperation Council countries and quasi-sovereign debt markets;
- potential sales of some Dubai World assets and consequent reevaluations of certain asset classes globally, especially commercial property;
- handling of Dubai World’s debt restructuring and the effect on investment flows into and from the UAE.
Nonfinancial channels that could transmit effects to the region:
- foreign direct investment;
- trade;
- remittances;
- sells-offs of Dubai World assets.
Uncertainty and mitigation:
- Considerable uncertainty around the scope and magnitude of these effects as the event is still unfolding.
- Impact would be muted because of recovery and growth in the region as a whole.

Risk assessment shifts:
- The event is likely to have an impact on future risk assessments of quasi-sovereign entities and on 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.”
Policy and transparency recommendations:
- Transparency and the timely provision of informative data on quasi-sovereign commercial entities would be crucial for such corporations’ access to international investors.

IMF Survey: IMF Says Dubai Debt Fallout Contained, Events Still Unfolding (December 4, 2009).