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Success of Dubai Bonds Hailed 
as ‘a Message to Sceptics’

DUBAI - Economists, business leaders and investors on Monday welcomed Dubai’s $20 billion bond issue and the Central Bank’s explicit support for it as bold steps that would boost sagging confidence in the UAE’s economy.

But the region’s largest investment bank EFG-Hermes tempered the upbeat mood with a warning that any market rally triggered by the federal government’s assistance for the emirate would probably be brief.

The investment bank’s comments came as Dubai stocks rallied by as much as eight per cent on Monday on news of the Central Bank’s commitment to buy $10 billion worth of the bonds that Dubai launched to meet its financial obligations. Critics have recently questioned whether the federal government would adequately support Dubai amid the dramatic downturn in the emirate?s once-booming economy.

“The success of the bond issue is a clear message to the sceptics who try to divide the UAE into seven emirates. These bonds show the UAE is one country under one government, which operates in a dynamic consonance to face challenges,” said Shaikh Nasser Al Mualla, chief executive of Bank of Umm Al Quwain.

The Federal National Council Speaker and Chief Executive of Mashreqbank Abdul Aziz Al Ghurair added: “The world should know there is confidence in the UAE leadership and that the country is confident about its economy and financial institutions. The world can deal with the UAE with the same mentality as it used to do six months ago.”

Nabil Al Yusuf, director general of Dubai Executive Office, described the bond issuance and the Central Bank’s purchase of half of the instruments as a pre-emptive measure to avert potential adverse effects on the economy. The move would restore confidence in the UAE economy in general and Dubai in particular, he said.

EFG-Hermes weighed in with a UAE Strategy Note that it had prepared just before the bond programme became public.

“An announcement of federal assistance would trigger a sharp short-term rally across the board in Dubai and (to a lesser degree) Abu Dhabi.

“It should also help deflate current Credit Default Swaps (CDS) spreads for Dubai,” EFG-Hermes said. Credit default swaps are similar to insurance contracts that provide an investor with protection against the risk of default by the bond’s issuer.

Indeed, credit markets reacted positively to news of the bonds. The cost of insuring Dubai sovereign debt with CDS fell by 20 per cent to about $750,000 per $10 million of five-year debt — down from between $920,000 and $950,000 on Sunday.

Speaking to Khaleej Times, Dr Farouk Soussa, head of Standard & Poor’s Middle East Government Ratings, said the bond issue and subscription by the UAE Central Bank “greatly alleviates risks associated with Dubai’s refinancing, and at the same time confirms the support that Dubai and all the emirates can receive from the federal government.”

Moody’s Investors Service said that the bond programme could support debt ratings of six Dubai companies that the service had placed under review for a downgrade earlier this month. The six companies were Emaar, DP World, DIFC Investments, Dubai Holding Commercial Operations Group, Dubai Electricity and Water Authority and the Jebel Ali Free Zone.

“However, the fact that the Dubai government requires such a large amount of financial support is also a reflection of the serious challenges that Dubai’s economy faces,” Moody’s said in a statement.

Simon Williams, regional economist at HSBC, said the UAE was making clear that it was willing and able to provide support as needed.

“Dubai’s economy will still slow sharply this year. Credit markets will remain tight and export markets are weak, but this is a crucial step to put a floor under the near-term downturn,” he said.

EFG-Hermes maintained that greater disclosure about the economy, the government and its finances were needed to help improve investor confidence and overall corporate governance. It also argued that the UAE would benefit from more formal arrangements that specify the degree of recourse that individual emirates have to the federal government.

However, it said these changes would “entail a significant deviation from the status quo and... this is unrealistic in the short-term.”

The investment bank revised upwards its estimate of Dubai’s debts to a total of $74.2 billion, excluding the latest $20 billion bond issue. EFG-Hermes said the emirate’s obligations stood at $62.9 billion with an additional $11.4 billion from companies in which the Dubai government has a minority holding. The total debt is projected to incur repayments of $16.4 billion in 2009, $9.8 billion in 2010 and $19.0 billion in 2011.

Last week, the state-run Borse Dubai rolled over its $3.5 billion debt after raising $2.5 billion in syndication and the remaining $1 billion through shareholders.

issacjohn@khaleejtimes.com