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S&P expects Dubai’s debt load to worsen, doesn’t see pre-pandemic recovery until 2023

Jet skis pass by residential skyscrapers on the waterside in the Dubai Marina district in Dubai, United Arab Emirates, on Monday, June 8, 2020.

Christopher Pike | Bloomberg | Getty Images

DUBAI, United Arab Emirates — Ratings agency S&P forecasts an 11% contraction for the Dubai economy in 2020, with an already high debt load set to increase as some of the emirate’s vital sectors struggle to rebound from the impact of the coronavirus pandemic.  

“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,” the agency wrote in a client note last week. It sees the economy “only recovering to 2019 levels by 2023.” 

Tourism in recent years has comprised around 12% of the emirate’s annual GDP, which is far more diversified than that of its heavily oil-reliant Gulf neighbors. Still, Dubai — known as a trade and logistics hub as well as a major shopping and tourism attraction in the Middle East — has suffered as the pandemic has decimated air travel and the hospitality industry, as well as other sectors like construction and real estate.  

Oil makes up only about 1% of Dubai’s GDP, but the far higher reliance on hydrocarbons by its neighbors means that the oil price plunge has slashed regional partners’ capacity for investment, tourism and trade.  

“We estimate, based on publicly available information, that Dubai’s  gross general government debt will reach about 77% of GDP in 2020,” which amounts to 290 billion AED ($80 billion), S&P said. 

“However, a broader assessment of the public sector, including government-related entity (GRE) debt, indicates a debt burden closer to 148% of GDP,” S&P wrote. 

London consultancy Capital Economics estimates that in the next three years, some $21 billion of Dubai’s GRE debt will come due — which it calculates as 19.4% of GDP — and another $30 billion in 2023. 

Dubai’s government, however, released its own assessment in a rare debt issuance in September to reveal a debt figure significantly lower: 123.5 billion AED as of end-June, or roughly 28% of GDP.   

The question of Dubai’s debt level is a tricky one, and comes down to how the debt is calculated: Dubai’s government does not include debt owed by government-related entities, or GREs, while ratings agencies like S&P and Moody’s attempt to do so based on available information on local borrowing, since GRE debt is issued by private and unrated bodies.

“Rating agencies are in an awkward position when it comes to Dubai,” Nasser al-Shaikh, a former head of Dubai’s finance department, told CNBC. Al-Shaikh rejects the agencies’ numbers. “With it being unrated, their estimates were simply wrong as shown in disclosures made by Dubai when it recently raised $2 billion — which of course was oversubscribed several times.”

Dubai returned to public debt markets in September for the first time in six years, successfully issuing $2 billion in debt in the form of a $1 billion Islamic sukuk and a $1 billion government bond. The value of orders exceeded $10 billion. 

Aircraft operated by Emirates, at Dubai International Airport in the United Arab Emirates.

Christopher Pike | Bloomberg | Getty Images

“Sovereign debt is only that which (the Dubai government) is legally responsible for debt being extended to the Government, its public institutions and commercial debt that carries its guarantee,” Al-Shaikh said in response to S&P’s report. “GREs are commercial entities that borrow on commercial terms and it’s completely up to the Sovereign to decide if it will assist them financially or not.” So far, he noted, the only public sovereign commitment from Dubai has been to support its flagship carrier Emirates Airline with a lifeline of 7.3 billion AED. 

In that way, the government aims to demarcate what debt it is liable for and what it isn’t. Ratings agencies, by contrast, attempt to cover all possible liabilities.

The emirate suffered a debt crisis in 2009, triggered when major GREs couldn’t repay their debts, leading Dubai to rely on support from UAE capital Abu Dhabi in the form of billions of dollars in loans and bonds that have since been consistently rolled over as they become due. But the ratings agency doesn’t predict a similar situation this year.

“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, with Abu Dhabi’s backing,” S&P wrote.

The Dubai Economic Department did not respond to a request for comment.

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