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Tight Dubai debt spreads ‘worrisome’

|By Arabian Post Staff| Dubai’s external debt continues to be at tight spreads, given still high leverage and refinancing challenges but this is somewhat offset by certain positive aspects, a Bank of America-Merrill Lynch research report said.

The positives include still solid local bid on the shorter end of the curve and its low-beta defensive status within an emerging markets context. The Iran nuclear deal is another positive for Dubai, which could boost the emirate’s trading activity.

The downside risks are a prolonged period of low oil prices, regional geopolitical threats, loss of competitiveness due to stronger USD, material domestic liquidity tightening, real estate collapse, increased borrowing for projects with low return and global risk aversion, which may cut market access to Dubai Inc.

Referring to Abu Dhabi’s situation, the Bank of America-Merrill Lynch research says the emirate’s external debt is tightly held due to its scarcity value. The downside risks are a prolonged period of low oil prices, regional geopolitical threats, and inability to implement sufficient fiscal consolidation.

Other notable references include Bahrain, whose external debt already is already pricing in a downgrade to junk. But the report feels Bahrain benefits from a perceived Saudi put and a local bid at the short end of the curve, which mitigates fiscal vulnerabilities.

With the budget approved, a forthcoming bond issue is likely and could be priced generously to place the bonds, which could pressure existing bonds somewhat. Downside risks are persistently low oil prices further pressuring external and fiscal accounts, deeper than expected rating downgrades and lack of Saudi support, the report points out.