Dubai bonds to service debt needs

Dubai: The $20 billion bond issue announced by Dubai government on Sunday is expected to meet all the immediate debt obligations of Dubai government and government owned entities and ease the tight liquidity situation in the economy, according to economists and analysts.

The subscription of 50 per cent of this unsecured, $20 billion, five-year notes by the UAE Central Bank at an annual interest rate of 4 per cent, is expected to boost the confidence global financial markets in Dubai.

"The launch of the Dubai bonds is another move by the government to assure the markets that the emirates are working together. The bond issuance, with $10 billion already purchased by the central bank, gives Dubai the ability to refund all its needs for this year, which we estimate at $14 billion. We expect markets to respond positively," said Marios Maratheftis, an economist with Standard Chartered Bank.

Global rating agency Moody's estimate Dubai's refinancing needs at $15 billion. Considering the global financial environment, earlier this month, the rating agency had hinted that it could downgrade the credit ratings of the key Dubai government owned entities. Responding to the bond issues, Moody's said yesterday that this development will have a positive impact on the credit outlook of these entities.

Moody's analysts said yesterday that the statement from the Dubai Government's Department of Finance suggests that there will be no restrictions on how the Dubai government uses the proceeds from the bond.

"Assuming that there are no such restrictions, this news is clearly supportive for the ratings of the six Dubai Inc.," Philipp L. Lotter Senior Vice President and Tristan Cooper Vice President - Senior Analyst and Moody's in an emailed statement.

The local stock markets and credit market responded positively to the news yesterday. While the Dubai Financial Market Index gained nearly per cent, the cost of insuring Dubai's debt in the credit default swaps market fell up to 200 basis points to 750 basis points yesterday bankers said.

Analysts and economists said that the move to fund liquidity through a sovereign bond issue is expected to put to rest a lot of speculation about the financial health of Dubai's economy.

"While it will bring in money to fund several ongoing projects, it will also put to rest a lot of malicious media propaganda against Dubai and the UAE that was going on in the recent months," Dr Mohammad Al Asoumi, a Dubai based economist.

EFG-Hermes, a regional investment bank estimates that Dubai has an outstanding debt of $74.2 billion comprising $62.9 billion from wholly- or majority-owned entities and $11.4 billion from minority-owned entities. The bank had long argued that a Federal level intervention is necessary to stabilize the finances of Dubai.

"It (the bond issue) is a strong signal that that Dubai is getting Federal support. It was widely expected and it will send out a strong signal to the financial markets that Dubai is capable of meeting its financial obligations," said Monica Malik, an economist with EFG-Hermes.

Despite the extreme shortage of liquidity in the international markets, some of the Dubai government entities have been raising money from banking entities. Last week, in a loan refinancing deal, Borse Dubai Limited raised $2.5 billion from a group of foreign and local banks and investors.

In November last year Dubai Advisory Council had estimated that Dubai's sovereign debt obligations at $10 billion, and sovereign assets of more than $90 billion. While the debt obligations of government owned companies were placed at $70 billion, their combined assets were estimated at $260 billion.