Hosting World Expo 2020, which requires $7 billion in capital spending, will put relatively little financial pressure on Dubai’s government, EFG-Hermes said.
Wael Ziada, head of research at EFG-Hermes, said Dubai’s budgeted $7 billion in capital spending for the Expo bid includes $1.4 billion for a metro extension, most of which is likely to be spent towards the end of the decade.
In a research report, Ziada argued that Expo 2020 is a good fit with Dubai’s existing strengths.
He said the emirate’s economy is likely to develop along the same path regardless of whether Dubai is awarded the right to host Expo 2020 on November 27.
required investment in the Expo site and related infrastructure fits in well with pre-existing plans to increase the emirate’s transport, trade and tourism capacity as it cements its role as a regional entrepot. However, an Expo win is likely to accelerate the execution of these plans, increasing upside risks to the UAE’s non-oil growth but also potentially increasing inflation and debt risks,” said Ziada.
According to Ziada, Expo 2020 direct spending is a limited burden on Dubai Government. “We believe that the government is likely to finance this through a mix of bond issues, bank borrowing, and cash raised from asset disposals and profits from Dubai Inc businesses. Operating expenses of $1.7 billion will be covered by ticket sales and sponsorship.” However, Ziada noted that building the supporting infrastructure would require significant investment from government-related entities and the private sector, and this is likely to drive a recovery in credit growth at a time when Dubai is still recovering from the previous boom.
“We estimate that developers will have to spend $7.2 billion to increase hotel capacity by 2020. We note that the recovery is already leading developers to resume work on major luxury projects, while the Dubai government has introduced a tax break for builders of mid-range hotels,” said Ziada.
He noted that a win for Dubai may generate a brief rally in UAE stock markets, but that would likely to be rapidly followed by profit-taking in which investors sell the fact, particularly after a year of exceptional gains. “However, Dubai’s economy is in the middle of a strong cyclical upswing that is supportive for earnings surprises. Banks are our preferred play on the Expo and Dubai’s recovery.”
“Contractors and Emaar are also likely to enjoy strong revenue growth in the medium term, but there are risks to margins should the developmental motive take precedence over profit maximisation, we believe. Among contractors, we prefer Depa and DSI over Arabtec.”
According to economists, an Expo 2020 win would boost Dubai’s local economy up to one per cent.
Shaikh Ahmed bin Saeed Al Maktoum, Chairman of Dubai’s Supreme Fiscal Committee, President of the Dubai Civil Aviation Authority, Chairman of Emirates airline and Chief Executive of the Emirates Group, said Dubai has “high hopes” of winning the bid. Sao Paulo, the Turkish city of Izmir and Russia’s Ekaterinburg are all competing to host the event, which takes place every five years. The Paris-based Bureau International des Expositions will announce its selection on November 27.
Dubai expects to attract about 25 million visitors based around the theme of “Connecting Minds, Creating the Future” and plans to build a 4.3 million sqm exhibition area at a site in the desert south of the city to host presentations from 182 countries.
HSBC estimates that about 45,000 new hotel rooms will be needed for the event, increasing supply by about 6.4 per cent every year until 2020 at a cost of more than Dh31 billion. “The government is planning to spend about Dh26 billion on infrastructure for which we do not know the funding source.”
HSBC estimates that a further Dh30 billion will be raised through debt and equity from private companies that are building hotels. -Issac John (Khaleej Times)
