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Credit FAQ: Dubai's Already High Debt Burden Set To Worsen Amid A Deep Pandemic-Related Macroeconomic Shock

While it does not rate Dubai, S&P Global Ratings expects Dubai's economy will contract sharply by around 11% in 2020, owing in part to its concentration in travel and tourism, two of the industries most affected by COVID-19. We estimate, based on publicly available information, that Dubai's gross general government debt will reach about 77% of GDP in 2020; however, a broader assessment of the public sector, including government-related entity (GRE) debt, indicates a debt burden closer to 148% of GDP. Nevertheless, although we do not anticipate such a need, in the event of financial distress, we expect Dubai would receive further financial support from the United Arab Emirates (UAE), with Abu Dhabi's backing.

Following Dubai's return to the capital markets this year, investors have been asking S&P Global Ratings for its view on the unrated Emirate. Here we offer answers to some of their most frequently asked questions.

Frequently Asked Questions

How has Dubai fared during the COVID-19 pandemic?

Although Dubai's economy is somewhat more diversified than that of most its regional peers, we anticipate a sharp economic contraction of around 11% of GDP in 2020, only recovering to 2019 levels by 2023. Dubai's large exposures to tourism and aviation place it in a relatively more vulnerable position to the effects of COVID-19.

Low oil prices have had broad effects on Gulf Cooperation Council (GCC) economies, of which Dubai is one, but hydrocarbons directly contribute only about 1% to Dubai's total GDP. The indirect effect of weaker demand from Dubai's neighbors will dampen Dubai's trade, tourism, and real estate markets.

STR Global, a data intelligence and benchmarking firm, reported Dubai's hotel occupancy rate at 26% in June as inbound tourism sharply declined following global lockdowns and much-reduced air travel designed to curb the spread of COVID-19. The fact that fewer residents left Dubai during the hot summer months and instead spent more domestically to some extent has supported the economy. Local support for the economy cannot, however, offset the almost complete shutdown of inbound international tourism for most of 2020, and the likely slow recovery of the long-haul aviation segment that Dubai specializes in.

What are the fiscal implications for Dubai?

The Dubai government now expects to post a historically large central government deficit of AED12 billion (3.2% of GDP) this year, largely owing to the reduction in economic activity and the consequent expected 28% decline in revenue. We also expect significant off-balance-sheet expenditure, resulting in the government's net debt position worsening by more than what the headline deficit would imply, as has occurred in previous years (see chart 1).

Chart 1


We believe the below-the-line expenditure which causes the variance between headline deficits and the change in net debt mostly involves support for Dubai's struggling government related entities (GREs), an example of which is the recently disclosed AED7.3 billion (1.9% of GDP) already provided to Emirates airline in 2020. Support for GREs will likely be appreciably larger in 2020 than in the past, due to the broad cross-sector shock to Dubai's economy (see also "Twin Shocks Of Low Oil And COVID-19 Mean Double Trouble For GCC Corporates," published July 21, 2020, on RatingsDirect).

In total, we expect new government bond issuance and loans to total around 7% of GDP in 2020. The government has issued AED8.4 billion (2.2% of GDP) of public debt so far in 2020, marking the biggest year for Dubai's debt issuance since 2009. This, in combination with recently disclosed new bilateral and syndicated facilities through June 2020 (facilities that have increased by AED15 billion (4% of GDP) since Dubai's previous end-2018 disclosures) supports our estimation that 2020 will be another year where debt accumulation far exceeds the headline deficit. Separately, the government is likely to rely on its state-owned bank, Emirates NBD, to help plug any additional financing holes; Emirates NBD has historically extended about AED10 billion in new financing to Dubai each year, according to the bank's audited financial statements. Nevertheless, it is so far unclear how much support the government will give to its GREs this year, given opacity as regards government policy and data availability.

We expect fiscal deficits to moderate over the next few years, as pandemic effects subside. However, the government's debt-to-GDP ratio is likely to remain elevated at about the current levels.

How high will the Dubai government's debt burden rise?

We expect Dubai's gross general government debt to increase sharply to about 77% of GDP (AED290 billion) in 2020, compared with 61% of GDP in 2019. The increase in the debt burden ratio is partly driven by the sharp decline in nominal GDP. However, our overall estimate differs from recent media reports suggesting that Dubai's debt burden is actually much lower than previously thought.

Our estimate of Dubai's gross government debt for 2020 includes:

  • AED73 billion ($20 billion) in loans extended by Abu Dhabi and the UAE's central bank (CBUAE) in the wake of the 2009 financial crisis.
  • AED31 billion in outstanding securities issued by the government, as of Sept. 9, 2020.
  • AED27 billion in other bilateral and syndicated facilities.
  • AED160 billion in related-party bank loans from Emirates NBD, which is excluded from the table providing a breakdown of the government's outstanding direct debt in its latest bond prospectus dated July 29, 2020.

Dubai owns 56% of Emirates NBD through its holding company Investment Corp. of Dubai (ICD). By our reckoning, Dubai's government liquid assets largely comprise the minority listed holdings of ICD, which we estimate at AED22 billion (5.7% of GDP) in 2020.

How significant are Dubai's GRE-related contingent liability risks?

Dubai's GRE-related debt is significant, and in our view poses a risk for the government's longer-term debt sustainability (see chart 2). Based on publicly available information including IMF reports, we estimate total GRE debt at about 71% in 2020, which, added to general government debt, leads to a total gross public sector debt burden of 148% of GDP. We understand that three large GREs--ICD, Dubai World, and Dubai Holding and its subsidiaries--account for the vast majority of total GRE debt. There is limited disclosure about Dubai's public sector, however, and the true size and exposure of the Dubai government to its GREs therefore cannot be fully known.

Chart 2


Do you factor potential additional external support from Abu Dhabi or the UAE into your base-line scenario for Dubai?

Our base-line scenario does not include a situation where an external party would be required to step in to support Dubai in its ability to service commercial debt obligations. We expect Abu Dhabi and the CBUAE will continue to roll over the US$20 billion in loans they provided to Dubai in 2009 as they come due. These five-year facilities, which comprise 25% of our estimate of Dubai's debt burden, were last rolled over in 2019.

In a worst-case scenario, we believe that Abu Dhabi or UAE federal authorities would provide financial support to Dubai should it experience financial distress. We estimate Abu Dhabi's external liquid assets at about 290% of its GDP, equal to 175% of the UAE's GDP. However, we note that previous financial support provided to Dubai by the aforementioned parties had clearly defined parameters, which nevertheless did not prevent relatively widespread GRE debt restructurings.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Samuel Tilleray, London + 442071768255;
Secondary Contact:Trevor Cullinan, Dubai (971) 4-372-7113;

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