UAE Macro & Cross Assets Outlook


UAE investor sentiment remains cautious

Despite that the Dubai World default was averted by confirmation from Abu Dhabi government interaction, investors’ sentiment remains cautious. Some damage is already done. The authorities have been largely  muted since the debt restructuring announcement and that also has not help to improve the investor sentiment. With uncertainties on debt restructuring and the related media coverage, investors are not holding their breath for a quick recovery in the UAE.

The initial expectation for details regarding the restructuring plans of Dubai World’s US$22bn debt was end of January, while the plan was aimed to be released by the end of April. As of mid-February, there is still little clarity regarding the debt restructuring. And this uncertainty has been creating a snowball effect in the corporate sector as the companies and banks can’t yet estimate the eventual losses they have to take with the restructuring.

Dubai Worlds’s debt restructuring of US$22bn amounts to almost 34% of Dubai’s GDP, according BofA Merrill Lynch Global Research. As the restructuring goes beyond repayment of bonds and syndicated loans and include all type of liabilities, domestic liquidity and the economic activity will be hit.

Significant deleveraging in Dubai and a further damage in corporate balance sheets across the UAE is expected. As Abu Dhabi and Dubai economies are intertwined with low level of transparency, it’s hard to assume that Abu Dhabi will escape unscathed from Dubai restructuring. UAE’s total debt redemptions over the next three years average $30bn annually, and Dubai accounts for roughly 2/3 of these redemptions. Hence, a scenario for forced deleveraging that will hurt UAE corporates is still likely despite Abu Dhabi’s strong fiscal position.

GDP growth is very much likely to recover only gradually in 2010. Domestic credit expansion, high population growth, infrastructure spending and the vibrant non-oil sectors generated average growth of 8.8% yoy in 2003-08. Tables have turned in 2009 as all these trends reversed, the real estate bubble burst and Dubai restructuring paralyzed the credit market. Coupled with lower oil output, BofA Merrill Lynch Global Research estimates GDP has contracted by 2.1% in 2009. Only a small pick up in GDP growth in 2010, ranged from 0.6% to 2% is projected to come mainly  from Abu Dhabi.

Project pipeline is slashed and more cancellations is expected to come. Even before Dubai World’s debt restructuring announcement, the real estate market was under pressure. The prices have almost halved during the crises and together with the lack of funding, a chain reaction for project cancellations have been triggered. While UAE’s total project pipeline was US$1.4tn as of YE09, nearly 75% of these were residential or commercial real estate projects. One third of this pipeline has been either cancelled or put on hold as of January 2010 and approximately 85% of these projects put on hold or cancelled are construction projects. Given the excess in the real estate market and the level of leverage, it is expected that the consolidation in Dubai will be a lengthy process.

Project funding rates evidently crawl higher. The oil-liquidity link has collapsed as there are bigger holes to fill in before the savings filters into the economy. The deleveraging, the uncertainties regarding the debt restructuring, and deteriorating bank balance sheets also add to the pressures on the funding rates. Similar to Dubai CDS, the increased risk premium should also keep AED funding rates high until investor sentiment is restored.


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