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S&P predicts Dubai's debt burden will worsen and won’t recuperate earlier than the pandemic in 2023

Jet skis pass skyscrapers in waterfront residential areas in the Dubai Marina district of Dubai, United Arab Emirates on Monday, June 8, 2020.

Christopher Pike | Bloomberg | Getty Images

DUBAI, United Arab Emirates – The rating agency S & P is forecasting an 11% decline in Dubai's economy in 2020. The already heavy debt burden is expected to increase as some of the emirate's key sectors struggle to recover from the effects of the coronavirus pandemic.

"S&P Global Ratings predicts Dubai's economy will shrink roughly 11% in 2020, partly due to a focus on travel and tourism, two of the industries hardest hit by COVID-19," wrote the agency last week in a client report. The economy "will not recover to 2019 levels until 2023".

Tourism has made up around 12% of the emirate's annual GDP in recent years, which is far more diversified than that of its heavily oil-dependent Gulf neighbors. Still, Dubai – known as a commercial and logistics hub and a major shopping and tourism attraction in the Middle East – has suffered as the pandemic decimated air travel and the hotel industry, as well as other sectors such as construction and real estate.

Oil only accounts for around 1% of Dubai's GDP, but neighbors 'far greater reliance on hydrocarbons means that the collapse in oil prices has reduced the regional partners' capacity for investment, tourism and trade.

"Based on publicly available information, we estimate that Dubai's gross national debt will reach about 77% of GDP in 2020," which equates to AED 290 billion ($ 80 billion), S&P said.

"However, a broader assessment of the public sector, including government debt (GRE), shows a debt burden closer to 148% of GDP," S&P wrote.

London-based consultancy Capital Economics estimates that around $ 21 billion of Dubai's GRE debt will mature over the next three years – which is 19.4% of GDP – and another $ 30 billion in 2023.

However, in September the Dubai government published its own assessment of an infrequent debt issuance to determine a significantly lower debt level: AED 123.5 billion at the end of June, or around 28% of GDP.

Dubai's Debt: Conflicting Numbers

Dubai's debt issue is difficult and depends on how the debt is calculated: the Dubai government does not consider debt from government agencies or GREs, while rating agencies such as S&P and Moody's try to provide information on local borrowing available as GRE debt is issued by private and unrated entities.

"Rating agencies are in a tough spot with Dubai," Nasser al-Shaikh, former head of Dubai's finance department, told CNBC. Al-Shaikh rejects agency numbers. "Since it was not rated, their estimates were just wrong, as indicated by data from Dubai when it raised $ 2 billion recently – which of course was oversubscribed several times."

Dubai returned to public debt markets for the first time in six years in September, successfully issuing $ 2 billion in debt in the form of an Islamic sukuk of $ 1 billion and a $ 1 billion government bond. The order value exceeded $ 10 billion.

Emirates operated aircraft at Dubai International Airport in the United Arab Emirates.

Christopher Pike | Bloomberg | Getty Images

"National debt is only those who (the government of Dubai) are legally responsible for extending debts to the government, its public institutions and commercial debts that bear its guarantee," Al-Shaikh replied to the S&P report "GREs are commercial entities that borrow on commercial terms and it is entirely up to the sovereign to decide whether or not to receive financial assistance." So far the only public commitment from Dubai has been to support the flagship Emirates Airline with a lifeline of AED 7.3 billion.

In this way, the government wants to define which debts it is liable for and which it is not. Rating agencies, on the other hand, try to cover all possible liabilities.

The emirate suffered a debt crisis in 2009 that was sparked when large GREs were unable to repay their debts, causing Dubai to rely on support from the UAE capital Abu Dhabi in the form of billions of dollars in loans and bonds that have been consistently extended since then were they becoming due. However, the rating agency is not forecasting a similar situation this year.

"While we do not anticipate such a need, we do expect that Dubai will receive further financial assistance from the United Arab Emirates with the assistance of Abu Dhabi in the event of a financial emergency," wrote S&P.

The Dubai Ministry of Commerce did not respond to a request for comment.

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