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People in Dubai have not forgotten the crisis

Construction site in Dubai

European banks have been cutting back their foreign lending because of financial pressures in their home countries, while many have been burned by Dubai debt restructurings since 2009.

November 28, 2012 9:05 by

The International Monetary Fund estimates Dubai’s government-linked entities will need to repay about $9.4 billion of maturing bonds and syndicated loans in 2013 and $31.0 billion – much of it loans that were extended during the crisis – in 2014. It calls refinancing these amounts “a challenge”.

So Dubai will need to finance its projects from the markets, and the loan markets do not look as attractive as they did in the mid-2000s, when banks were scrambling to lend to the emirate.

European banks have been cutting back their foreign lending because of financial pressures in their home countries, while many have been burned by Dubai debt restructurings since 2009.

“People have not fully forgotten what happened during the crisis,” said one senior Dubai-based banker.

Another international banker said he had not heard of any serious financing plan for the shopping mall project so far.

“Given the magnitude of the project the government is talking about, we would be in the loop if there was a serious financing plan. This looks very initial and preliminary to me right now,” he said.

With foreign banks cautious, Dubai will need to turn to its local banks. But they may not be big enough, especially since rules introduced by the central bank this year in response to the crisis limit commercial banks’ exposure to state-linked entities. Some banks already exceed the limit.

“Local banks are liquid but I can’t see them pulling something like this alone,” said the first Dubai banker. “Even to finance 50 percent of the project, as it’s planned now, will be a challenge for them.”


That leaves the bond market. Here the climate has improved dramatically this year as investors have regained confidence in Dubai; yields on bonds from the emirate have plunged.

In particular, sukuk (Islamic bonds) from Dubai have attracted massive demand, partly because of a huge supply/demand imbalance among cash-rich Islamic funds. So sukuk could play a big role in Dubai’s financing activities.

However, bond market traders and investors said the Dubai government might not be able to raise more than roughly $3 billion through bond issues in a single year.

State-linked companies would probably find it more difficult to issue bonds and have to pay investors higher yields, especially since the Dubai government has been reluctant to provide explicit guarantees for their bonds.

The result, analysts said, is that Dubai will probably implement its big projects in phases spread over many years, with the financing of each phase contingent on economic and market conditions at the time.

Although Sheikh Mohammed said last week that construction of the shopping mall complex should start “immediately”, he did not give a time frame.

State-backed companies from Abu Dhabi could be invited to join in parts of the projects to improve access to financing.

“Abu Dhabi or some of its companies may be part of this mega development,” said an Abu Dhabi governmentofficial who did not wish to be identified.

“It is early days, let’s wait for the devil in the details.”

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