UAE: Dubai’s economic growth recovery is becoming more broad-based and gaining pace, according to a Bank of America Merrill Lynch report.
BofA Merrill Lynch Global Research, titled, “BofA GEMs Daily – Brazil improvement, UAE recovery, China capital flows highlighting the importance of resolving this row quoting the Institute for Near East and Gulf Military Analysis touched upon broad spectrum of issues and shows cautious optimism on overall growth and economic stability.
We spent three days in Dubai and Abu Dhabi meeting with public sector policy makers, private sector, and quasi-sovereign entities. Our trip reaffirmed our sense that the UAE recovery is well-entrenched and gaining pace. There is steady yet uneven progress in Dubai GRE deleveraging. Locally, the real estate recovery and improved banking sector liquidity are making for a constructive mood. All in, Dubai is likely to muddle through its challenges, but we see EXD spreads as tight.
After averaging 10% annual growth from 2000-10 and a slump in 2009, real GDP growth was 4.4% in 2012. With a fading drag from construction and real estate activity, growth likely accelerated to a preliminary 4.9% in 2013, according to the Dubai Department of Economic Development (DED).
The DED targets 4.7% and 5% growth in 2014 and 2015, respectively. Population growth also accelerated to 5% in 2013, above government forecasts of 3.8%. The DED is to announce the Dubai Strategic Plan (DSP) 2015-21 by September, and is likely to incorporate ambitious but realistic growth objectives. The DSP is likely to focus on productivity growth, including through regulatory framework improvements. The DED highlighted this was to alter the growth model, which historically has relied on factor accumulation (capital and unskilled and semi-skilled labor) with limited productivity gains.
The Dubai Department of Finance (DoF) indicates the preliminary outturn for the 2013 fiscal deficit (DoF presentation) has likely outperformed the AED1, 500 million (0.4% of GDP) targets. The 2014 budget also targets narrowing the deficit to AED880 million (0.2% of GDP). Although expenditures are set to increase 11% yoy, revenues are budgeted to increase 13% yoy on increased fee revenue collection (increase in Salik toll gates, metro use and a hike in property registration fees).
Medium-term capital expenditures are guided toward US$1-2bn for now, while the bulk of the Expo 2020-related capex is set to take place in 2016-20. An Expo 2020 Committee regrouping all major stakeholders has been set up to work jointly on the infrastructure master plan and parse out the capital spending requirements to GREs or the government.
The refinancing of the US$20billion Abu Dhabi debt is fiscally positive, though the DoF confirmed this portion of interest costs is off-budget, as debt proceeds were on-lent. Note that the Abu Dhabi Department of Finance will take over the US$1billion tranche from Abu Dhabi banks upon expiry in November. Interest costs on ENBD’s sovereign loan are also not recognized on-budget. The bulk of government deposits in the banking sector appear to be in local currency. As a result, the DoF is planning to issue in international markets at the opportune time to partially refinance its US$1.9billion EMTN maturity due in November. There appears to be no plans to seek a sovereign credit rating for now, as per the DoF.
“The real estate recovery and improved banking sector liquidity have given GREs breathing room. However, the recent Limitless and Drydocks difficulties highlight this is perhaps not yet enough for non-systemic or weaker entities,” in our view.
Asset disposals have proceeded at varying speeds across Dubai Inc. entities and officials have highlighted that the Dubai World 2015 maturity can be repaid.
The government is seeking advice on Dubai World’s 2015 and 2018 maturities, partly to reflect developments since the restructuring agreement in 2010. However, it also suggests some reluctance to sell controlling stakes in domestic crown jewel assets to fully meet the Dubai World 2018 maturity, in our view.
According to the DoF, the DFSF’s sole source of funds has been the US$20billion Abu Dhabi related-party debt, in addition to US$0.45billion in domestic bilateral loans. The DoF broadly confirmed our estimates that the bulk of the disclosed use of these funds has been to support the Nakheel and Dubai World restructurings through payment of Nakheel bonds and liquidity provision (totaling US$11.9billion), and support to Dubai World (US$8.9billion). Given that this support has been equitized, this is likely to make Dubai reliant on continued rollover of the Abu Dhabi debt facilities, in our view.
As of September 2013, the DFSF also has undrawn commitments of US$0.6billion toward Dubai World and US$4.1billion toward Nakheel, in addition to various guarantees. The expectation is better operational performance from GREs would prevent these contingent credit lines from being drawn; otherwise, the DFSF would have to raise the funds if it aims to honor its commitments. That said, the DFSF does not appear to be the only source of support available to GREs.
Our impression from our meeting with the Abu Dhabi government Executive Affairs Authority (EEA) is that the broader public sector in Abu Dhabi is firmly in expansionary mode. We believe this should support robust growth in economic activity, although the Abu Dhabi central government appears to be rationalizing spending. The latest official figures show 5.6% growth for 2012 (3.8% in the oil sector and 7.7% in the non-hydrocarbon sector), which is likely to remain steady.
Also, our sense from the meeting is that implicit support is likely to continue for strategic entities central to the emirate’s diversification drive, and that Abu Dhabi support to Dubai at the sovereign level remains strong.
The EEA conveyed a sense of commitment to execution and fast-tracking of the spending pipeline (AED330billion in capex over 2013-17 approved by the Executive Council). The latter was said to include ongoing, as well as new projects, within areas including nuclear energy, education, healthcare, cultural tourism and railways. Also, ADNOC investment is under way to raise domestic oil production capacity from 2.8million bpd to a target of 3.6mn bpd by 2020.