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Dh29b debt reduction plan underlines Dubai’s strong fiscal position, policy reforms

Dubai’s success in repaying its debt is in sharp contrast to the mounting debt pile across the world

Dubai’s plan to repay about Dh29 billion of debt by the end of 2023 has been facilitated by a strengthening of its fiscal position amid a strong recovery from the Covid-19 pandemic, asset sales, and the influence of policy reforms over the past five years, says Fitch Ratings.

Fitch does not rate Dubai, but affirmed the UAE’s rating at ‘AA-’ with a Stable Outlook in July 2023.

The ratings agency’s positive comments on Dubai are subsequent to state news agency WAM’s report, citing figures from the Public Debt Management Office (PDMO), that Dubai's public debt will be reduced by approximately Dh29 billion by the end of the year.

Since establishing the PDMO in 2022, Dubai has repaid or restructured some outstanding debt, and announced plans to list government stakes in 10 companies to raise capital and deepen financial markets. It listed four of those last year.

Dubai’s success in repaying its debt is in sharp contrast to the mounting debt pile across the world, which hit a record $307 trillion in the second quarter of the year as the global economy faced a crisis of adaptation to rapid monetary policy tightening by central banks. According to the Institute of International Finance, in dollar terms, global debt had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade.

The reduction in Dubai’s debt includes a "partial settlement" of a combined Dh20 billion loan availed by Dubai from Abu Dhabi and the Central Bank of the UAE in the wake of the 2008 global financial crisis.

S&P has estimated Dubai's gross general government debt will fall to 51 per cent of GDP, or about $66 billion, by the end of 2023, from 78 per cent of GDP in 2020, although broader public sector debt is expected to remain elevated.

Fitch projected that Dubai’s debt would decrease to the equivalent of 53 per cent of GDP by end-2023, from 62 per cent in 2022. “Our estimate is based on IMF data, adjusted for the latest repayments, to which we add loans from Emirates NBD which the IMF does not include in its debt metric,” Fitch analysts said. “Overall, we project the UAE’s consolidated debt to decline to 27 per cent of GDP by end-2023, from 30 per cent in 2022. We expect the continued widening of the tax base in individual emirates to support debt sustainability at both the individual emirate and federal government levels, as it will help strengthen their balance sheet and resilience to shocks.”

The reduction in Dubai’s debt improves the UAE’s headroom within its current rating category. However, the sensitivity of the UAE’s ‘AA-’ rating to falls in Dubai’s debt is low, due to the existing low consolidated debt level and general lack of transparency on the UAE’s GRE data.

The Dubai Statistics Centre reported in June that the population had risen 2.4 per cent YoY to 3.6 million, which follows 5.7 per cent growth between 2019 and 2022. “Notably, this has benefited the real estate sector, though property-related risks could re-emerge if supply-demand mismatches strengthen again in the future. Dubai has also benefited from strong regional demand associated with high oil prices, as well as a recovery of tourism flows, which have almost reached 2019 levels,” Fitch said.

Fitch analysts estimated that Dubai’s budget was broadly balanced in 2022. “A continued flow of positive economic news and data indicates that prospects for the budget to post a fiscal surplus in 2023 have improved slightly since we affirmed the UAE’s rating in July. The government’s ability to capture benefits from economic growth has been strengthened by the fiscal reforms of recent years, including the introduction of VAT in 2018 and a corporate income tax in June 2023.”

They said the profitability of Dubai’s government-related entities (GREs), including those in the real estate sector, has also been lifted by the economy’s recovery, supporting the public finances through higher dividend payouts. Emirates Group, for example, paid dividends of Dh4.5 billion in the financial year ended March 2023 (FY23), compared with nothing in FY22.

Dubai sold stakes in several large GREs in 2022, including Dewa and Salik, raising Dh26 billion.