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Investors reassured by Dubai bond sale to U.A.E.
Posted on 02/23/09
Investors reassured by Dubai bond sale to U.A.E.
Reuters
Published: February 23, 2009
A decision by the central bank of the United Arab Emirates to buy $10 billion in bonds from Dubai eased worries that the emirate could default as it grappled with the global economic downturn.
Dubai stocks jumped almost 8 percent on Monday, and the cost of insuring its debt fell sharply from peaks this month when credit default swaps for some Dubai-linked companies soared.
"The U.A.E. is making clear it is able and willing to provide support as and when it is needed," said Simon Williams, a regional economist at HSBC. "Dubai's economy will still slow sharply this year. Credit markets will remain tight and export markets are weak, but this is a crucial step to put a floor under the near-term downturn."
Facing a real estate slump that has led to thousands of job cuts, the cancellation of projects, and heightened concern about the quality of bank assets, Dubai needed quick access to funds to refinance $15 billion to $20 billion in debt this year.
But global banks have been reluctant to lend a hand. Borse Dubai, which operates the local stock exchange, struggled last week to refinance $3.4 billion from banks, pushing the emirate to turn to a state-owned investment company for most of funds.
In a clear signal that the government of the United Arab Emirates would not leave Dubai to struggle with the crisis alone, Dubai initiated a $20 billion bond program and said it would sell at least half to the central bank of the seven-member federation. "We took out the uncertainty that was weighing on Dubai," said Raed Safadi, chief economist for the Dubai government. "Businesses can now get on with their operations."
Analysts were reluctant to term the move a bailout, since the plan involved giving debt to the central bank - though at a subsidized rate of 4 percent annually - rather than equity. They were also skeptical about how much appetite there would be on the public market for the remaining bonds, given the low yields. But credit and equity markets reacted positively to the news.
The cost of insuring Dubai sovereign debt with credit default swaps fell to about $750,000 per $10 million of five-year debt, down from $920,000 to $950,000 on Sunday.
Dubai's benchmark stock index, which suffered a 72 percent plunge last year, advanced 7.91 percent.
Emaar Properties, a bellwether stock, soared 13.2 percent on news of the bond issue and a statement that it did not expect any further significant effect on its first-quarter results from the bankruptcy of its U.S. unit, John Laing Homes.
"The market was pricing in a Dubai bankruptcy, which was never the case," said Rami Sidani, head of investment for the Middle East and North Africa at Schroders Middle East. "Dubai is getting proper support from the federation, as it has a vital economic presence in the U.A.E. The U.A.E. has the reserves and oil surplus to be used in a rainy day, which is what we are going through today."
But analysts said $20 billion was not enough to meet the economic challenges facing Dubai, which threw itself onto the global stage by building the world's tallest tower, as well as islands shaped like palm fronds and the world map.
Property prices in Dubai have fallen at least a quarter from a peak in 2008, and banks have taken heavy provisions for bad loans and written down investment losses.
"We probably will see more response to help the economy," said Marios Maratheftis, regional head of research at Standard Chartered Bank. "I think what the economy needs is to provide it with liquidity so we can start seeing credit growth and so we can see the economy stand back on its feet."
The purchase of the Dubai debt adds to the array of tools the U.A.E. central bank can use to control monetary policy in a country that pegs its currency to the U.S. dollar, constraining its ability to intervene with the markets.
"The central bank can now buy and sell government securities to the banking system to control liquidity," said Nasser Saidi, chief economist at the Dubai International Financial Center.