The debt restructuring at Dubai World will hit economic growth next year, the IMF said, as credit rating agencies downgraded more Dubai companies. The IMF had expected the global economy to grow by 3 per cent next year, after close to zero growth this year due to the global economic slowdown.
"Our anticipation is that there will be a significant reduction in that growth rate, down from 3 per cent, probably somewhere between 1 per cent and 3 per cent," said Masood Ahmed, the director for the IMF's Middle East and Central Asia department. The Government, by contrast, maintained a positive outlook on economic growth. "Dubai World's debts do not affect the economic performance of Dubai or the UAE, and it is a matter of time before the company restructures its debts and honours its commitments as per a scheduled plan," said Sultan al Mansouri, the Minister of Economy.
"The UAE has already taken concerted efforts to meet the challenges arising from the financial crisis," he said, citing guarantees for bank deposits and the injection of extra liquidity into the banking system. Dubai World has asked creditors to restructure US$26 billion (Dh95.49bn) of debt, an unexpected move that triggered selling on stock markets and a spate of credit rating downgrades on government-related companies and banks. Before the announcement last week, Dubai World had been expected to pay $4bn to bondholders on December 14.
Standard & Poor's yesterday lowered its ratings on six Dubai Government-related entities, taking five of them into "junk" status. The companies downgraded were DIFC Investments, DP World, Jebel Ali Free Zone, Dubai Holding Commercial Operations Group, Emaar Properties and Dubai Multi Commodities Centre Authority, which was already out of investment grade before this latest action. "Standard & Poor's is of the opinion that, as evidenced in the case of Dubai World and Nakheel, the Dubai Government is either unable or unwilling, or both, to provide extraordinary government support in the form of timely and sufficient financial support to those of its [government-related entities] that provide essential government services on its behalf," S&P wrote.
These six companies remain on watch for further downgrades. The credit ratings agency also lowered its long-term ratings on Emirates Bank International (EBI), National Bank of Dubai (NBD), Mashreqbank and Dubai Islamic Bank because of their high exposure to government-related entities. Emirates NBD recently merged the assets and liabilities of EBI and NBD. "The negative implications of the CreditWatch placements partly reflect remaining uncertainties about the full impact of Dubai World's requested standstill on the banks' asset quality, financial performance and capitalisation," said Emmanuel Volland, a credit analyst at S&P. Despite the downgrades, S&P said it continued to expect extraordinary support to be made available from the UAE authorities for the banks.
The proposed debt restructuring at Dubai World involves Nakheel, the developer of the Palm islands, and Limitless, another developer that had planned to build a Panama Canal-sized waterway around the emirate. The restructuring has dampened hopes of an early rebound from the financial crisis in Dubai, where business confidence had been showing signs of tentative improvement in recent months. Property prices were beginning to stabilise after suffering declines of as much as 50 per cent from the peak of the market, while the financial services sector was also showing signs of returning confidence, helped by companies returning to bond markets that had been largely dormant for a year.
The IMF said it was encouraged by Dubai World's announcement that it would strive for equitable treatment of creditors in the debt talks. "We do believe that continuous engagement and communication with creditors and investors will be critical to ensure an orderly and timely solution," said Mr Ahmed. * with agencies @Email:scronin@thenational.ae Tale of three cities, b6