My column this week mines the IMF's
latest Article IV report on the UAE, which gives a remarkable level of detail of the debt problems facing the country, Dubai and Abu Dhabi. Here's a sneak preview for TCA's readers:
Anyone who has been watching the Barclays Dubai Tennis Championships over
the past fortnight knows that professional tennis has been
revolutionised by a technological innovation called Hawk-Eye. Introduced
in the UK a decade ago, Hawk-Eye is a computer system that analyses
video feeds to verify whether a ball has landed in bounds. With the top
male players such as Marcos Baghdatis blasting
serves over the net at speeds in excess of 200 kph, it's getting harder
for the human eye to determine exactly where a ball strikes the court.
Hawk-Eye provides nearly instant replays, enabling Novak Djokovic and
other players to challenge judges who call a ball out when it was in or
vice versa. Hawk-Eye therefore returns a level of transparency and
accountability to an increasingly fast-paced game.
In the increasingly fast-paced world of international government
finance, however, we still have to rely on the IMF to keep an eye on the ball. Last
month, a team from the fund visited the UAE to analyse the situation at
Dubai World and the effort by Dubai to restructure US$26bn (Dh95.49bn)
of the company's debt. Spectators will recall that Dubai 's announcement
in late November that Dubai World would seek a standstill from
creditors touched off a firestorm in international markets over the risk
posed by heavily indebted governments. It also prompted Abu Dhabi to
move forward with $10bn in emergency financial aid to Dubai.
Throughout the entire brouhaha, the most frequent complaint has been
about the lack of transparency over Dubai Inc's debt and
how the Dubai Financial Support Fund and Dubai World intend to treat
creditors. As a result, following this $26bn matchup has involved fielding a volley of leaks and confidential briefings. One source
lobs over a trial balloon on potential haircuts for bankers, another
responds with a blistering backhand on sovereign rights. No one can keep
score but everyone seems sure that if they so much as blink, the other
side is sure to pull a fast one.
It doesn't help that Dubai World still hasn't said exactly how much
debt it has, or that Dubai still has not issued a tally of how much it
and the companies it controls owe, and that Abu Dhabi has not said word
one about what it expects in return for its $10bn. This uncertainty is
reflected in the cost of insuring both emirates' debt. Dubai is still
considered one of the world's riskiest borrowers, riskier than even
Greece or Iceland. And Abu Dhabi, thanks to its commitment to Dubai, is
considered riskier than Qatar.
While they might not reveal much to the public, the emirates do hold
discussions with the IMF. So the IMF's report could offer some rare
insight.
The report is 67 pages long and about as interesting as watching paint
dry. But hidden in those drab pages are some real eye openers:
* The IMF says that Dubai Inc debt amounts to $109bn:
That is far higher than the consensus estimate of roughly $85bn, but
below the most extreme analyst estimates of nearly $160bn. The IMF's
estimates may even be a bit low, since it tallies only $14.35bn in debt
subject to Dubai World's proposed standstill. Dubai World itself has put
that figure at $26bn. The IMF says it found another $11.7bn at the
Dubai World subsidiaries that have been excluded from the restructuring,
such as DP World. There's another $14.8bn at Dubai Holding, the IMF
reckons, and $20.4bn at the Investment Corporation of Dubai. Combined
with the $23.7bn owed directly by the emirate and another $24.4bn by
other government companies like the Dubai Electricity and Water
Authority and the Dubai International Financial Centre, it comes out to
$109.3bn in debt.
That works out to the equivalent of 130 per cent of Dubai 's economy.
And of that figure, about $35bn is guaranteed by the Dubai Government,
an amount equivalent to 40 per cent of Dubai's GDP.
The IMF also says Dubai Inc faces $15.53bn in debt repayments this year,
which isn't much compared to the $24.4bn it will need to repay next
year and the $25.1bn that comes due in 2014. But it represents 15 per
cent of each dirham the combined governments of the UAE are projected to
earn this year.
* Next, the fund estimates that the UAE's foreign assets last year =
$323bn: that includes sovereign wealth funds such as the Abu Dhabi
Investment Authority and overseas investments by high net worth
individuals. That is down significantly from the $568bn this in foreign
assets held in 2004.
* The IMF's report says UAE is to introduce a value-added tax, or VAT,
in 2012: The government has been discussing a VAT for a long time now,
with the IMF recommending that having one could help diversify the
government's revenue base away from oil. But it has never publicised any
definite plans to introduce one. The IMF says authorities have assured it that the VAT will be in place in
just two years.
* The IMF says that Dubai is considering a
capital-gains tax on property: Property sales registered by Dubai 's
Land Department might be subject to taxes on profits in order to
discourage property speculation.
* By the fund's calculations, rising loan defaults could require the
Government to inject more capital into banks: The IMF estimates that
falling property prices this year could push as many as eight banks,
five of them in Dubai, below the Central Bank's new capital
requirements, requiring a total of $2.9bn in additional capital. If
Dubai World forces bankers to take haircuts, those numbers will be even
higher. If banks have to write off 25 per cent of their loans to Dubai
World, the IMF says, nine banks may need as much as $7.8bn in additional
capital. If they have to take a 50% haircut, the UAE might find itself
having to pump as much as $9.8bn into 10 banks.
