|By Arabian Post Staff| US$51.6 billion of Dubai’s debt will come due for repayment in 2016-18, with US$27.4 billion due in 2018, IMF has estimated. Over US$28.9 billion of Abu Dhabi’s debt will also come due during this period.
According to IMF, these imply short-term rollover risks for both Dubai and Abu Dhabi, but for a larger extent in the case of Dubai.
The Fund feels that these are large maturities in a context of tightening domestic liquidity, competition from other governments in the region to finance deficits, and possible reversal of capital inflows.
Short-term rollovers risk may also translate into higher cost of funding, which ultimately could put further strains on debt servicing capacity and ultimately on the fiscal accounts and, to a lesser extent, on the financial system.
In addition, as most of the corporate debt is denominated in foreign currency, rollover risks could be reflected in an increase in the forward exchange rate premium.
According to IMF, Government Related Entities (GREs) pose contingent fiscal risks and an adverse scenario could worsen the government balance sheet.
As public transfers have been made to support specific companies, the market perceives that governments implicitly guarantee GREs’ debt.
An adverse scenario could worsen the government balance sheet, be transmitted to the financial sector and contribute to feedback loops. A scenario that combines a global downturn with a real estate shock under which the government would take over 20 percent of the GREs’ debt would imply a substantial increase in the government debt-to-GDP ratio, to 32.1 percent, twice as large as under the baseline scenario (14.1 percent of GDP in 2016)
The Fund points out that in the case of Dubai, the debt ratio could triple to 59.6 percent of GDP if there is a severe shock to the real estate sector, compounded with a global downturn. However, these risks can be mitigated by the large fiscal buffers.
Regarding financial risks, loans to GREs have increased by 6 percent so far in 2016 and correspond to about 7.6 percent of the assets of the banking sector. Greater corporate leverage could render firms less able to withstand negative shocks to income or asset values and quickly spill over to the financial sector, generating a vicious cycle as banks curtail lending, IMF warns.