It is now clear that the chances of a fire sale of Dubai’s ‘jewels in the crown’ — a reference to blue-chip assets such as Emirates airline and Jebel Ali Free Zone — stand completely mitigated as the emirate takes firm control of its financial situation.
Analysts are in near agreement that Dubai’s sovereign debt is stabilising and deleveraging is progressing. A definite improvement has happened in the borrowing maturity profile, which gives the emirate breathing space and greater control of the repayment scenario.
The successful issuance of the 15-year $750 million (Dh2.8 billion) sukuk has helped refinancing of debt over longer terms and on lower rates.
Recent announcements by government-owned entities that they are advancing debt repayments ahead of the due date have gone a long way in changing market perceptions. The latest entity to do so is Dubai Holding Commercial Operations Group, which is repaying $319 million 18 months ahead of time.
Nakheel repaid about $640 million in February, advancing the repayment by a similar timeframe.
Except for 2009, when the request for the renegotiation of $25 billion repayment shook global credit markets, Dubai has generally enjoyed a good reputation as a borrower. There is a historical perspective for this perception, although it was not expressed in terms of credit ratings or swap ratios as is done today.
This columnist had the opportunity of getting some insights into Dubai’s historical financial profile from a septuagenarian Indian expatriate who had worked closely with Shaikh Rashid Bin Saeed Al Maktoum, the father of modern Dubai, during the early phase of the emirate’s development.
According to him, Dubai always depended on borrowed money to build infrastructure, but raising this money was never a problem. In fact, Shaikh Rashid’s idea of financial clout was not how much money the government had, but how much money it could raise at any given time.
In those days, it was customary for Kuwait and Saudi Arabia, or even Iran, to extend loans to smaller countries or emirates. Although the money was made available as loans with a fixed tenure, donor countries used to write these off as gratis, a norm that got established in view of consistent payment defaults.
Dubai too used to get this kind of funding, but Shaikh Rashid made it a point to repay the money within one-and-a-half to two years, although it generally came with a five-year tenure. This greatly enhanced Dubai’s standing as a borrower, but not necessarily expressed by way of formal credit ratings or other parameters that established creditworthiness.
When it came to Dubai, creditors were always willing to lend more.
Just as the landmarks of New Dubai have been built on resources mostly raised from the market on commercial terms, Shaikh Rashid borrowed money to build Jebel Ali Port and the Free Zone. The visionary that he was, Shaikh Rashid could foresee how these developments would launch Dubai on the global platform.
In fact, he had to overrule much opposition to the idea from advisors and top economic experts of the time, who could not see the scope for a second port when the existing port facilities were not being adequately utilized.
But Shaikh Rashid resolutely went ahead with his plan, which was in a way his response to the fallout of an economic crisis caused by the dislocation to Dubai’s pearling business following the development of the artificial pearl culture by the Japanese and the realisation that the emirate’s development model was not to be driven by oil. The plan was funded through borrowings.
A few decades of Jebel Ali have seen it virtually emerge as a jewel in the crown, which market analysts had once counted as a fire sale candidate. Recent events show that such fears are clearly misplaced.