Gulf finances

The Gulf region is not expected to tip back into growth until next year, but hints of a return to the good times are already evident in oil-rich Abu Dhabi. Plans for the emirate’s first-ever Formula One Grand Prix next month include a weekend of red-carpet events, complete with an opening-night concert by Beyoncé. The contrast with Dubai couldn’t be starker: as Abu Dhabi shows off its party-planning skills, its resource-poor neighbour remains focused on its tattered finances.

An expected $10bn sovereign bond issue will be an important barometer of sentiment as Dubai attempts to right itself. Official numbers are scarce, but Standard & Poor’s estimates that the collapse of the boom of 2003-2007 has left Dubai and its state-backed companies with $80bn-$90bn of debt. Of that, about $50bn, equivalent to 70 per cent of Dubai’s yearly output, will come due in the next three years.

Healthier companies, such as ports operator DP World, will be able to make payments from their own cash flows as recovery takes hold. Other debt will be rolled over. But with at most $3bn-$4bn remaining in the emergency fund set up in the wake of an initial $10bn debt-raising backed by Abu Dhabi in February, there is little room to cover much beyond a $3.5bn debt payment due in December from Nakheel, a stricken developer of luxury resorts.

Few doubt that Dubai will raise the $10bn. Abu Dhabi has little to gain from a financial basket case in its own backyard. The question is whether the private investors who helped power Dubai’s services and property boom can be tempted to take part. Fears over Dubai’s credit worthiness are easing: spreads on Dubai’s 5-year debt have fallen to about 300 basis points, from more than 1,000 in January. Abu Dhabi, whose five-year debt trades at 100bp above Libor, has sold $13bn of debt this year without much fuss. But investors may be less keen on an economy that lacks Abu Dhabi’s cushion of 8 per cent of the world’s known oil reserves.END