Dubai's sukuk points to stabilisation of sovereign finances

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Dubai: Strong recovery in asset prices, particularly the real estate prices and the prices of locally listed stocks combined with nearly 5 per cent GDP growth fuelled by the non-oil sectors is boosting investor confidence in Dubai and is likely to boost government borrowing, according to analysts.

'dubai sovereign debt appears to be stabilising, in line with our view that the growth recovery would ease deleveraging trends at the sovereign level, said Jean-Michel Saliba Middle East and North Africa Economist at Bank of America Merrill Lynch (BofA Merrill Lynch).

Earlier this week the Dubai Government issued a $750 million 15-year sukuk priced at 5 per cent, tapping mostly regional liquidity. About 61 per cent of investors in the sukuk came from the Middle East, 17 per cent from Britain and 10 per cent from the rest of Europe, according the Dubai Department of Finance.

The money raised through the sukuk will help Dubai repay its $1.9 billion medium term notes (MTNs) maturing in November 2014. Improving investor confidence is expected to further drive down the cost of funds and lengthen debt maturities.

Positively, Dubai has managed to lengthen its borrowing maturity profile with the issuance of a 15-year bond, and take advantage of the lower borrowing costs in the market. For comparison, its November 2014 MTN maturity was a 5-year bond priced at 6.4 per cent, said Saliba.

Using bond prospectus data, BofA Merrill Lynch estimates that Dubai's sovereign debt appears to be stabilising, in line with their view that the growth recovery would ease deleveraging trends at the sovereign level. As of March 2014, and including the recent issuance the bank estimate the government debt at $54.8 billion (55.9 per cent of Dubai's GDP), compared to $50.5 billion (55.5 per cent of GDP) in the same period of last year. This includes a $24.8 billion loan form Emirates NBD as of year-end 2013.

As a sign of improving government finances, the direct sovereign guarantees have come down to $5.9 billion (6 per cent of GDP) from $7.8 billion (8.5 per cent of GDP) a year ago, thanks to Dubai Electricity and Water Authority (DEWA), Roads and Transport Authority (RTA) and Ports Customs and Free Zone (PCFZ) liability prepayments.

The 2014 Dubai budget targets a narrowing of the fiscal deficit to Dh880 million, from the 2013 budget target of Dh1.5 billion. Although expenditures are set to increase by 11 per cent year on year on subsidy reclassification, debt service and development expenditure, revenues are budgeted to increase by 13 per cent year on year on increased fee revenue collection. Improved revenue collection is the result of the introduction of two new Salik toll gates, increased metro use, higher revenues budgeted from hotel fees and a hike in property registration fees.

BofA Merrill Lynch has cautioned that the fiscal policy needs to remain disciplined especially as massive funding is required for building infrastructure related to the hosting of Expo 2020. 'the bulk of the Expo 2020-related capex is set to take place in 2016-20. Fiscal room to accommodate the additional spending without jeopardising debt dynamics could have sensibly increased by that time, if the Dubai government remains prudent, said Saliba.

Source: gulfnews.com

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