Dubai, Abu Dhabi may face funding cost shock on high GRE debt levels

High debt levels among Dubai and Abu Dhabi government related entities, or GREs, present a significant risk to the sovereign balance sheets of both emirates, which may face funding cost “shocks” as they attempt to roll over $60bn worth of debt maturing this year and next, according to a new International Monetary Fund report. The global financial and economic crisis has unveiled the fiscal and financial challenges posed by GREs, which will likely “continue to pose significant risks to the sovereign balance sheet and the financial system,” the IMF said.

Although sovereign debt is low in Dubai and Abu Dhabi, the UAE’s biggest emirates, the two emirates still face risks from the large borrowings by the GREs, even though much of the debt does not carry explicit government guarantees. The size of the GRE debt has potential implications for the domestic banking sector and debt capital markets, the IMF said.

Of Dubai’s total publicly-held debt of $113bn, GREs account for $89.4bn, or 81.2% of GDP generated in Dubai and the northern emirates in 2010. In Abu Dhabi, GREs account for $92.4bn of the emirate’s total debt of $104bn, or 48.6% of Abu Dhabi’s 2010 GDP, according to the IMF.