articles Ratings /ratings/en/research/articles/200930-credit-faq-dubai-s-already-high-debt-burden-set-to-worsen-amid-a-deep-pandemic-related-macroeconomic-shock-11676113 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List
NEWS

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

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

NEWS

Supranationals Special Edition 2020 Says Multilateral Lenders Are Addressing Challenges From COVID-19

COMMENTS

Supranationals Edition 2020: Comparative Data For Multilateral Lending Institutions

COMMENTS

Institutional Framework Assessment: U.K. Local And Regional Government: Local Authorities


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

image

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

image

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;
samuel.tilleray@spglobal.com
Secondary Contact:Trevor Cullinan, Dubai (971) 4-372-7113;
trevor.cullinan@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.