Dubai seen selling assets, issuing bonds to pay debt

Dubai may have to step up asset sales and government borrowing as a heavy debt repayment schedule for state-linked companies over the next few years puts pressure on government finances.

As the Gulf emirate recovers from a burst real estate bubble it forecasts a budget deficit of up to 2% of gross domestic product this year. While that is very low by global standards the government will need to increase revenue in the face of its huge debt burden, analysts say.

With state-owned companies sitting on more than USD 100 billion in debt, some USD 30 billion worth of loans and bonds of predominantly state-linked firms are due to mature in 2011-2012.

State flagship Dubai World, which leads the pack of debt-ridden enterprises, now owes USD 39.9 billion, according to a document seen by Reuters last month, much higher than widely expected debts of mid-USD 20 billion.

The conglomerate is scrambling to put together a debt restructuring plan that could involve the sale of up to USD 19.4 billion in assets. They may also now include ports firm DP World, whose debt was previously ring-fenced.

"With 2010 public revenues projected at USD 8 billion, Dubai's fiscal muscle seems weak compared to off-balance sheet guarantees it may have committed itself under the Dubai World restructuring proposal," Bank of America Merrill Lynch said in a note to clients.

Bank of America Merrill Lynch estimates Dubai's debt could be as high as 170 percent of GDP. In comparison, the debt burden of Greece, which was saved from bankruptcy by a 110 billion euro (USD 141 billion) bailout by the European Union and International Monetary Fund this year, is seen at 103 percent of GDP for 2010.

Dubai's debt crisis is dragging down the United Arab Emirates' economy, which is projected to grow 2.1% this year, the slowest pace in the region. Abu Dhabi is set to run a budget deficit for a second year in 2010 following its USD 10 billion bailout of Dubai last year.

"The large implied funding gap is likely to lead to renewed pressures on Dubai and ultimately the Abu Dhabi sovereign through implicit support and increased external issuance," said Bank of America Merrill Lynch.

Asset sales along with bond issues are Dubai's best option to boost revenue because other measures would not generate enough cash on time to plug debt holes, analysts say.

Other prized assets that Dubai could sell in the future are the Jebel Ali Free Zone and Dubai World stakes in the Atlantis Hotel and casino operator MGM Resorts International.

"There is little doubt that the government would have to sell some of its assets to raise funds," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.

Dubai's fiscal deficit is also prompting the government to look at new ways of boosting income, such as cutbacks on fuel subsidies, municipal taxes and through various fees.

Eager to maintain its status as a low-tax business centre, however, the emirate is likely to opt for small increases in indirect taxes, leaving direct taxes unchanged and cutting spending instead. It announced last week that in the coming years new government projects would only start on merit.