Sunday 14 February 2010

UAE: Underweight



This is going to be the end of the 2010 GCC outlook marathon; this year I covered four out of the six GCC countries but next year I’ll include Bahrain and Oman.

Dubai has been stealing headlines in the past couple of months, unfortunately only spilling bad news.


“Dubai World Seeks to Delay Debt Payments as Default Risk Soars” Bloomberg (Nov 26, 2009)
“S&P downgrades ratings on four UAE banks” Arabian Business (Dec 3, 2009)
“Dubai World asset sale nears, debt talks plod.” Reuters (Feb 3, 2010)


State-owned conglomerate, Dubai World, shocked global markets when it requested a standstill on its USD26 billion worth of debt. This wrote-off all signs of recovery, even though Abu Dhabi gave them a little help.

After a contraction of 3% in real GDP, the UAE is expected to grow 2% in 2010; the slowest rate in the GCC. This was due to lower oil prices along with collapse of the real estate. Moreover, Dubai debt issue is expected to pull down the economy as it accounts for 33% of UAE’s GDP.


CDS are not looking good
Dubai’s debt insurance has been gradually raising; they are up 130 bps this month. Dubai CDS rose above 600 bps for the first time since November; which means that in order to insure USD10 million it will cost USD 600,000.

















Dubai is considered one of the riskiest sovereigns in the world, behind only Argentina, Venezuela, Ukraine and Pakistan.
Low inflation
The inflation in the UAE has hit a nine year low of 1.5%, primarily due to a decrease in the households category.
Equities
In relative terms, UAE equities might look cheap when compared to the emerging markets, as the UAE trades at a 7x P/E multiple against 13x for EM (2010E). Nevertheless, we have to adjust for various aspect to get a better “apples to apples” comparison. UAE’s debt-to-equity ratio is 83%, while the EM is 33%. If we take the assumption of raising equity to level the D/E ratio to 50%, UAE’s equities will trade at a P/E of 12x, which doesn’t look too attractive.
Below is a chart of Dubai Government holdings:


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