the skyscraper indicator proving right yet again?
online.wsj.com
OCTOBER 10, 2008
Dubai's Heavy Debt Load Stirs Concern
By CHIP CUMMINS
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DUBAI -- The global credit crisis is forcing a new look at this Mideast boomtown's mounting international debt load and its ability to fund its ambitious growth strategy.
Dubai, one of seven emirates that make up the United Arab Emirates, has been spending heavily on roads, a subway system and other infrastructure projects to keep up with the city-state's explosive growth. The government, through state-owned and state-controlled real-estate developers, has embarked on a series of ambitious property projects aimed at turning Dubai into a tourism and business destination.
Emaar Properties PJSC, partly government-owned, is building the world's tallest skyscraper. On Sunday, Nakheel, a government-backed developer, unveiled plans for a 3,281-foot-high tower here. Nakheel is already building a palm-tree-shaped archipelago of man-made islands packed with luxury villas and hotels.
Dubai doesn't have big reserves of hydrocarbons. Instead, it has been bankrolling much of its building boom through international debt markets. With those all but shut these days, analysts are warning of a slowdown if global markets don't free up soon.
"Given the magnitude of the projects that Dubai is taking on, it will certainly need to borrow internationally," said Philipp Lotter, a Dubai-based analyst at Moody's Investors Service. "If that access is impaired ... certain investments have to be put on hold."
A Dubai finance official declined to comment, and the government didn't respond to emailed questions about its debt management.
Dubai is among the most heavily indebted governments in the wealthy Persian Gulf. Standard & Poor's estimated at the end of last year that Dubai government debt represented 41.8% of its gross domestic product, compared with 22% in Bahrain and 2.9% in Abu Dhabi.
While Dubai doesn't have much oil, its economy is diversified and growing. But it hasn't obtained a government-debt rating from international ratings agencies. A rating might reassure debt investors somewhat that government assets and revenue are sufficient to back up that borrowing.
CMA DataVision, a price-discovery service, calculates a "cumulative probability of default" for sovereign borrowers. It estimates the likelihood of Dubai defaulting over the next five years is just shy of 20%. That's up from 4.3% at the beginning of the year.
Still, many analysts and economists say chances of the government getting into real trouble remain low. Most assume that next-door-neighbor Abu Dhabi, one of the world's largest oil producers, would extend a lifeline.
There are other headwinds buffeting Dubai, clouding the ability of the government and its corporate entities to raise cash. Banks have tightened lending. Dubai's red-hot real-estate market shows signs of cooling. Its stock markets have fallen recently, wiping out billions of dollars of wealth among retail investors and further constraining liquidity. |
