The cost of insuring against a Dubai default plunged to the lowest level since Q3 2009 on Tuesday amid subsiding concerns over the restructuring of its troubled quasi-sovereign conglomerates.
Credit default swap (CDS) spreads on Dubai’s sovereign debt narrowed by around 55 basis points since Friday’s close to reach about 324 basis points on Tuesday. The decline totals about 83 basis points since Q1 2011, according to the Sovereign Risk Monitor data by CMAVision.
While Dubai is still among the ten riskiest sovereigns in the world, it has steadily moved lower in the risk-rankings and is now at No. 10, below Egypt, which has a CDS spread of 340.30 this morning. Dubai risk is coming down and the Dubai CDS spread has come down from 455bp at the beginning of March to around 320bp currently.
An MSCI upgrade to emerging market status in June could be a major boost for the UAE’s international reputation, as it will help make the stock markets more attractive to institutional investors, lift trading volumes and lower investors’ risk perception of the exchanges, said Rasmala, a brokerage firm.
The signing of the debt accord between Dubai World and about 100 creditors on a formal standstill – first requested by the company in late November 2009 – has led to a revival in global investor confidence in the emirate, amid increasing signs that Dubai’s economy is back on track.
Analysts agree that the current socio-political unrest in some countries of the Middle East and North Africa (MENA) region has in fact worked in Dubai’s favour, with a large number of tourists, who would have otherwise chosen to holiday in Egypt or elsewhere in the region, now flocking to the emirate instead. Moreover, experts have also hinted that with Bahrain among those affected by the turmoil, Dubai International Financial Centre (DIFC) may see some international financial services organisations choose it over Manama.
“Dubai’s economy is recovering,” said Standard Chartered Bank in a recent note to its clients. “The recovery is based on three pillars: logistics, hospitality and retail. It is also important to highlight that Dubai is seen as the safe haven of the region. Given elevated risks elsewhere, Dubai is benefiting from a flight to quality. This benefits the hospitality and financial sectors. The uncertain situation in Bahrain, which has a banking sector 10 times the size of its economy, could end up benefiting Dubai’s financial centre. There are already signs that funds and companies are fleeing to Dubai from Bahrain.”
Citibank, another major international bank, echoes StanChart’s analysis. “The UAE may be a net beneficiary of the political turmoil experienced in other parts of the Middle East,” it notes, and reckons that Dubai’s economy grew 3.6 per cent 2010, and is forecast to rise 5 per cent in 2011, jumping to 6 per cent in 2012.
“Due to its relative political stability, we believe there is a possibility of a diversion of commercial, investor and tourist activity from less stable parts of the region. The external sector thus is the main driver of the recovery, with gains being posted both in export growth, and a reduction in imports,” a recent Citibank report stated.
“Dubai’s economy, in particular, is showing signs of strong external recovery as sectors such as tourism, trade, logistics and transportation respond strongly to the rebound in the global economy and may get a boost from the political instability in regional competitors,” it pointed out.
In the end, it is clear that Dubai is firmly back on the recovery track. As Mohamed Alabbar, Chairman of Emaar Properties, recently said: “Dubai does well when the region is doing well, and we also prosper when the region isn’t doing so well.”