DUBAI: A year after scaring global markets over its debt crisis, Dubai still has a huge legacy of debt to deal with over the medium term, and is leaning on its core economic sectors for recovery.
The focus in the city-state has shifted to the traditionally strong sectors of trade, logistics and tourism in order to recover slowly from a crisis caused primarily by a boom-to-bust real estate frenzy.
Financial markets woke up in the red last November 26 after Dubai signaled its need for a standstill on debt payments by its largest conglomerate, Dubai World.
But Dubai succeeded in buying time, convincing its lenders to restructure some 14.4 billion dollars (10.8 billion euros) of debt over five and eight years, at low interest.
But it still needs to secure capital to meet debt repayments.
Monica Malik, chief economist at EFG-Hermes investment bank, says "we see fewer concerns over debt in the shorter term. Restructuring the debt is reducing concerns about debt servicing over the short term."
"In the medium term, they still have the issue of raising funds to reduce the debt levels. That will require some asset sales."
Dubai World’s wide range of assets include DP World, the world’s fourth largest container port operator, and Jebel Ali Free Zone, as well as stakes in Atlantis Hotel in Dubai, US retailer Barney’s and MGM Resorts.
It is trying to delay selling off assets until a hoped-for significant recovery in the global economy helps to lift values.
Meanwhile, other government-related companies, known as Dubai Inc, are feeling the pinch of debt servicing, although not on the scale of Dubai World.
Dubai Holding is a diversified group owned entirely by Dubai ruler Sheikh Mohammad bin Rashed Al-Maktoum — the man behind the emirate’s ambitious, yet extravagant development.
It has already been buoyed with an injection of two billion dollars from the government, but its financial arm, Dubai Group, is said to have recently missed two scheduled payments on a 330-million-dollar loan.
Mohammed Al-Shaibani, who has emerged as Sheikh Mohammad’s lieutenant in the fight to sort out the emirate’s debt crisis, told the Financial Times earlier this month that the government will intervene when needed.
"I don’t want to put any more money in as the government, but I will do it as and when it’s required," said the head of the ruler’s court, who is also a member of the Supreme Financial Committee, created to tackle the debt problem.
Thanks to a lifeline of 20 billion dollars from neighboring Abu Dhabi, the Dubai government managed to step in to avert a default by Dubai World and take control of its restructuring.
Estimates for Dubai’s total debt vary, but it is put at a minimum of 100 billion dollars.
The debt overhang, combined with a continuing decline in Dubai’s real estate sector, which has shed more than half of its value, maintain the state of uncertainty over the emirate’s economy.
"It is still going to be a difficult time. The Dubai economy is going to feel the effect of the real estate bubble and the debt over the medium term," Malik said.
The emirate’s banks still also face uncertainty over their exposure to troubled firms and the real estate sector.
"The legacy problem is really in the local banks, which have still not cleaned up their balance sheets," said Ali Al-Shihabi, chairman of Dubai-based Rasmala Investment Bank.
"That needs to be done, and new capital be injected into the banks so they can resume lending. Until that is done the recovery will not be complete," he told AFP.
Away from real estate, Dubai is building on the strength of its core sectors, which have picked up pace along with the global economic recovery.
The Dubai statistics centre said last month it expected GDP to grow by 2.3 percent this year, way above a 0.5 percent growth forecast by the International Monetary Fund, which had said GDP contracted by 1.3 percent in 2009.
The IMF said last month that growth in Dubai’s tourism and trade has been better than expected.
Malik said "there has been support from external sides, including trade, (Emirates) airline, airport, and tourism … These are the areas that Dubai has developed very well."
"We saw a strong rebound in tourism and trade. These will drive growth," she said.
Dubai boasts the busiest and most modern airport in the Middle East, home to Emirates Airline, the largest carrier in the region whose net profit surged 351 percent in the first half of the current financial year.
Shihabi believes Dubai’s "core" economy has emerged stronger after the crisis as services in hospitality, logistics and free-zone trade have become available at a competitive cost. At the same time, hotel rooms, offices and homes are now "available in quality and abundance for the first time."
"When you add that to the first class airline and airport, you get a winning model that is unbeatable regionally," he added.
