Euromoney: Is Dubai Back?

Euromoney, February 2015

When the Dubai-based bank Emirates NBD released its annual results in January, there was a far more significant number in the background than the bank’s robust net profit. It was the sudden dramatic improvement in its bad loan ratio from 12.6% in the third quarter to 7.8% in the fourth: an almost overnight transformation from what you might call a debt-addled balance sheet to a reasonable one, comfortably covered.

The Emirates NBD story will be covered in greater length with a CEO interview in our next edition, but the improvement in its NPL ratio represented the first of what are likely to be many knock-on effects of a deal struck the previous week, when Dubai World secured the agreement of what it called “a substantial majority” of its creditors to restructure the $14.6 billion of debt that plunged it, and all of Dubai, into crisis in 2009. A first restructuring took place in 2010; January’s new deal involves early repayments of some of that restructured debt, and an extension of some of the rest of it to a 2022 maturity instead of 2018, but with better terms for creditors.

So for Emirates NBD, for example, the impact was an enormous chunk of the loan book shifting from the non-performing section of the accounts, to performing. A further knock-on effect was that its bad loans coverage ratio jumped to over 100%. In a flash, the whole health of the institution has improved.

As the biggest bank in the UAE, this is one of the more visible beneficiaries of the Dubai World agreement, but in fact the ripple effects will be felt all over Dubai, the UAE, and indeed among creditors worldwide. Among the bigger institutions that have been central to the restructuring are Standard Chartered, HSBC and Abu Dhabi Commercial Bank.

And that, in turn, helps to improve the increasing feelgood factor about Dubai over the last year, as the emirate has appeared to move to stronger health, with landmark IPOs such as Emaar Malls Group and, until recent oil price declines affected the broader outlook for the Gulf, a steadily improving stock market.

But is Dubai really fixed? Some worry that some familiar themes are being played out again.

It’s true to say that the Dubai Financial Market’s value has doubled in 18 months. But it’s also true that it quadrupled in a year, then halved. That’s an alarming level of volatility. Dubai apartment sales went up 23% in 2014 – yet that all happened in the first half of the year, after which prices flat-lined, and there are 25,000 additional units about to come on stream in 2015. Again, there’s no steadiness, no sense of sustainable direction.

And, while Dubai World’s $2.6 billion sale of the Jebel Ali Free Zone, freeing up money to repay creditors, was exactly the sort of deal those creditors wanted to see, whom did Dubai World sell it to? DP World, the ports operator, which is itself majority owned by Dubai World. And while assets are shifted from hand to hand to buy more time to pay back billions of dollars of debt, Dubai’s hosting of the World Expo in 2020 has brought with it ever more ambitious plans for further infrastructure and aviation spending. In September Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, approved a $32 billion investment in the expansion of an airport.

So Dubai World’s restructuring is to be welcomed, particularly by the banks who are exposed to it. But caution is to be advised before claiming that Dubai’s problems are behind it for good.