Dubai: Abu Dhabi’s fiscal strength, improved liquidity in the banking system, relatively low leverage in the corporate sector and considerable progress in deleveraging of Dubai’s government related entities make the asset price surge in recent months more realistic according to economists.
“While we have for some time been highlighting our concerns regarding the sustainability of asset price inflation, we consider that Dubai today is much more resilient to such shocks than it was at the height of the previous cycle in mid-2008, for three main reasons,” said Farouk Soussa, Chief Middle East Economist of Citigroup.
In contrast to the previous asset price boom of mid-2008, Soussa said the banking sector liquidity is less vulnerable to exogenous shocks and is likely to remain supportive of local asset markets. In addition, in recent years Dubai’s economy made considerable progress on deleveraging and smoothing debt maturities. Refinancing risk among some of Dubai’s Government Related Entities (GREs) has been significantly reduced.
“Rising property prices have not, to date, led to a significant rise in construction and leverage. Despite the differences, we also recognise that Dubai is a dynamic and fast changing economic landscape,” said Soussa.
Institute of International Finance (IIF) a Washington-based association of global banks and financial institutions said in its latest regional economic outlook that the leading financial indicators of the UAE such as equity market valuations, real estate prices, business confidence index and the evolution of credit default swaps (CDS) are supportive of the recent asset price recovery.
Dubai’s sovereign CDS spreads declined from 226 basis points (bps) in 2012 to 155 in May end indicating improved market confidence in government debt and creditworthiness of government related entities (GREs).
“The factors driving the economic growth and asset prices this time are different. While the last boom was driven by asset bubbles boosted excessive credit growth, this time around credit growth is reined in by macro-prudential measures such as regulatory limits on loans to GREs and property investors based on strict loans to value ratios,” said Garbis Iradian, Deputy Director of IIF, Africa/Middle East.
While Dubai’s $20 billion debt refinancing agreement with the Central Bank of UAE and Government of Abu Dhabi has eased the debt servicing burden, the IIF has cautioned Dubai against further build up in public debt.
Citi’s Soussa also has cautioned against potential rise in property speculation. “Signs may emerge that construction activity is responding to potential speculative demand in the real estate market, and that this is leading to oversupply issues and rising corporate sector leverage. In such circumstances, we believe vulnerability to exogenous shocks is likely to creep back into Dubai’s economy,” he said.
Although the public sector debt is more than 100 per cent of according to the IMF, the successful debt restructurings of the past few years have smoothed out the repayment schedules for this debt.
“The recovery in asset prices combined with strong underlying growth makes the debt manageable, if there is no further accumulation,” said George T. Abed, Senior Counselor and Director IIF, Africa/Middle East.
