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Credit FAQ: How Has Dubai Fared Amid The COVID-19 Pandemic?

In this article S&P Global Ratings responds to frequently asked questions from investors on how we view Dubai's economic fundamentals from a credit perspective. Our views of Dubai's credit fundamentals are also important for the analysis of the Dubai-based issuers we rate. Since we do not rate Dubai itself, our views are based on publicly available information.

Frequently Asked Questions

How sharp of an economic contraction did Dubai experience in 2020?

Dubai is a relatively wealthy (GDP per capita at $32,000 in 2021) and diversified, services-oriented economy. The emirate (one of seven in the United Arab Emirates [UAE]) acts as a regional financial and transportation hub and--unlike most economies in the region--the oil and gas sector makes only a small direct contribution to GDP (about 2% of real GDP). Dubai's traditional growth engines of trade, transportation, retail, and tourism were adversely affected by global travel restrictions and domestic restrictions on movement to reduce the spread of COVID-19. Real GDP contracted 10.9% in 2020 (see chart 1). The tourism sector (defined as accommodation and food services, plus transportation and storage) contributed 56% of the overall decline. We include the transportation sector, as a large component relates to the performance of Dubai's airports and Emirates Group. Tourism's contribution to real GDP fell to about 13% in 2020, from 18% in 2019. A further 30% of the 10.9% decline in 2020 came from the wholesale and retail trade sectors.

Chart 1


In 2020, Dubai announced a UAE dirham (AED) 6.7 billion (1.7% of 2020 GDP) fiscal stimulus package, aimed at supporting businesses and the private sector, mostly through liquidity measures such as fee, tax, and fine deferments and reductions. The measures spanned the hardest hit sectors, including tourism, international trade, construction, and health care. In January 2021, the government launched an additional package worth AED315 million (0.1% of 2021 GDP), raising the total value of economic stimulus announced to AED7.1 billion (1.8% of 2021 GDP). The new plan extended some of the initiatives announced in the previous stimulus packages until June 2021.

The emirate itself also benefits from UAE federal measures. These include AED256 billion ($70 billion; 19% of UAE GDP) in loans and liquidity measures provided by the Central Bank of the UAE (CBUAE) under the Targeted Economic Support Scheme, which was extended to June 2022, and AED16 billion in federal economic stimulus announced in March 2020, renewable every six months. The latter incorporates the suspension of work permit fees and reduction of labor and other charges with the aim of providing liquidity and lowering the cost of doing business. Over the past 12 months, the UAE has introduced several initiatives to increase its attractiveness to global investors and skilled talent, including changes in restrictions on foreign ownership for onshore companies, extending a 10-year golden visa to groups of investors and highly skilled talent in strategic fields, and implementing social law changes.

How will the lifting of global travel restrictions and start of the 2020 World Expo (Expo 2020) affect Dubai's economy and specific sectors?

We expect Dubai's economy to expand 3.5% in 2021, supported by high vaccination rates in the UAE, with over 85% of the population having received two doses, and the easing of global COVID-19 restrictions. The high level of vaccine availability in the country allowed the federal government to offer the Pfizer-BioNTech vaccine to children aged 12-15-years from August 2021.

The opening of Expo 2020 this month following a year delay is likely to provide a more muted boost to GDP growth than expected before the pandemic. We forecast visitor arrivals to Dubai will not return to 2019 levels until at least late 2022. However, in our view, the six-month event will improve hotel occupancy and increase footfall in malls, benefitting the retail sector.

The nonoil private sector's performance as measured by the IHS Markit Dubai Purchasing Managers' Index has been above the 50-mark since June 2021, indicating faster growth in business activity on the back of improving demand. Although Dubai's dependence on oil is not substantial, it has benefited from improved business sentiment and investment flows into the region due to the oil price recovery this year.

Structural oversupply in the housing market should keep real estate prices relatively subdued, notwithstanding the recent price recovery in certain segments (see: "Real Estate Recovery To Be Uneven In Dubai," published Oct. 11, 2021, on RatingsDirect). However, relatively low prices do not necessarily mean weak activity in the construction sector. Residential unit presales have picked up significantly due to pent up demand from international and local investors and developers will need to deliver on these projects over the coming three-to-five years.

A weaker pipeline of infrastructure and flagship tourism projects and our expectation of lower oil prices--with Brent oil assumed to fall to $55 a barrel in 2023--could dampen economic activity in Dubai and the region more generally over the medium-term (see: "S&P Global Ratings Revises Oil And Natural Gas Price Decks," published Oct. 4, 2021). We expect real GDP growth to average about 2% over 2022-2024, sustained by traditional growth engines such as trade and transportation.

In our view, labor supply has been a key driver of economic activity in Dubai rather than productivity gains or capital investment. We note that many people live in the emirates surrounding Dubai, especially Sharjah, and commute to Dubai for work. We understand this drives up the number of people working in Dubai by about 700,000 each day. We project population growth of a similar rate to our relatively modest medium-term real growth forecast of 2% over 2022-2024. This will result in largely flat real GDP per capita growth and is in sharp contrast to the high official population growth estimates over 2016-2019, which averaged about 8%.

Are there challenges to Dubai's growth model from Saudi Arabia?

We currently do not factor any significant impact on Dubai's economy related to the Saudi government announcement in February 2021 that it will stop signing contracts with companies who have regional headquarters outside Saudi Arabia in 2024. Most international companies' regional offices tend to be in Dubai. In October 2021, the Saudi government also announced plans to offer new incentives and create special economic zones to help convince multinationals to relocate their regional headquarters. It remains to be seen how successful the Saudi government's strategy will be. In our view, it will partly depend on the enforcement of the announced rules and how attractive the incentives are compared to Dubai's well-established infrastructure and legal and cultural norms.

What are your expectations for Dubai's government deficit following an increase in 2020?

We estimate the central government fiscal deficit at AED12 billion (3% of GDP), in-line with the government's revised budget. Dubai's 2020 budget was slated to be the largest in the past seven years, with total expenditure of about AED66.4 billion. Following the onset of the pandemic and an expected decline in revenue, the government prudently cut some key spending, revising the total down to about AED57 billion. On the revenue side, the budget had factored in economic dividends from Expo 2020. Given its postponement, revenue realization is estimated at AED44 billion, substantially lower than the originally budgeted AED64 billion, although actual data on the 2020 fiscal outturn has not been released. The government's budget statement for 2021 outlines spending of about AED57 billion, with revenue at AED52 billion and a deficit of about AED4 billion, or about 1% of GDP. We estimate government spending largely in-line with the budget but expect revenue of closer to AED49 billion, resulting in a fiscal deficit of near 2% of GDP.

Our key measure of a government's fiscal performance is the change in net general government debt expressed as a percentage of GDP. In contrast with the reported deficit, this measure also captures the impact of exchange rate movements, the recognition of contingent liabilities, and other factors affecting the government's financing needs. In this regard, we note that between 2014 and 2019, the actual net debt stock rose 2 percentage points (ppt) of GDP on average, despite Dubai recording headline fiscal surpluses during the period. This reflects below-the-line lending to government-related entities (GREs), which we expect will continue. We estimate the change in net general government debt will average about 3% over 2021-2024 (see chart 2).

One example of this below-the-lines spending is the government's AED11.3 billion ($3.1 billion and about 3% of GDP) capital injection to national airline Emirates Group. In its financial statements, the airline's board also mentioned that it tapped additional industry support programs of nearly AED800 million (0.2% of GDP) in 2020-2021. Overall, we estimate below-the-line support to GREs in 2020 could be about AED17 billion (4% of GDP).

Chart 2


What is the size of Dubai's debt over-hang under your calculations?

We estimate Dubai's gross general government debt at about 76% of GDP in 2021. The components of gross debt are as follows:

  • 51% is related-party bank loans from Emirates NBD, a Dubai-based bank. The government of Dubai owns 56% of Emirates NBD through its holding company Investment Corp. of Dubai (ICD);
  • 24% is $20 billion in loans extended by Abu Dhabi and the CBUAE in the wake of the 2009 financial crisis; and
  • 25% is outstanding securities issued by the government, as well as other bilateral and syndicated facilities.

Our estimate of Dubai's debt stock increased sharply in 2020, owing to the widened fiscal deficit and sharp contraction in nominal GDP. Last year, Dubai returned to the international capital markets for the first time since 2018, issuing $2 billion of Eurobonds in September 2020. The $20 billion in support provided by Abu Dhabi and the CBUAE was rolled over in March 2019 for another five-year period--again with a concessional 1% interest rate. We believe that Abu Dhabi may provide further financial support to Dubai if required. However, we note that previous support did not prevent relatively widespread GRE debt restructurings. We expect the debt-to-GDP ratio will remain roughly the same over our forecast horizon as the deficit tightens and economic growth picks up.

By our reckoning, Dubai's government liquid assets largely comprise ICD's minority listed holdings, which we estimate at AED22 billion (5.7% of GDP) in 2020. As a result, we estimate net general government debt at about 70% of GDP in 2021.

We estimate GRE debt at about 65% of GDP in 2021. Adding both direct government (76%) and GRE debt, we estimate total public sector debt at a relatively high 141% of GDP.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Trevor Cullinan, Dubai + (971)43727113;
Research Contributor:Purnima Nair, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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