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Why Dubai's s risk of debt default is below India’s

By Vicky Kapur

The cost of insuring five-year Dubai debt against default plunged to under-400 basis points on Wednesday, below not only certain unstable European and regional economies, but also below that of some economies perceived to be more stable, such as India’s.

With the emirate’s economic engine roaring back to life in 2011, Dubai’s five-year credit default swaps (CDS) dropped to 399.24 basis points on Wednesday, February 8, according to CMAVision’s Sovereign Risk Monitor.

Dubai’s cumulative probability of default (CPD) is now at below 25 per cent (24.7 per cent), much lower than India’s 30.2 per cent (end-of-2011 data). India’s proxy default risk stood at 400.1 basis points at the end of 2011, and analysts believe it may have trended up further in 2012 with the recent scaling down of its economic growth forecasts, which are expected to widen its fiscal deficit this year.

Since peaking at 655bp in February 2010, Dubai’s five-year CDS spread has shrunk considerably despite ongoing global economic uncertainty. The emirate’s worst-hit real estate sector is now well on its way to recovery, with property prices stabilising all across Dubai even as the more established pockets are witnessing a demand-led price appreciation.

While the Arab Spring uprising in certain countries in the Middle East has added to regional risk perception, the consequent increase in tourism and investor interest that Dubai and the UAE in general have seen on account of being a political and financial safe haven, have led Dubai’s economy to benefit.

“As the UAE does not share the political and economic characteristics of regional countries under turmoil, no contagious unrest scenario was reported towards the Emirati landscape,” Bank Audi said in its recent report on the country. “On the contrary, Emirates are seemingly profiting from the indirect spillover effects of the redirection of business, trade and touristic flows from other countries in the Arab MENA region,” it said.

According to Dubai’s Department of Economic Development (DED), key economic sectors and economic activity in Dubai remained stable and growing in 2011, with the DED issuing 14,360 business licenses during the year.

The professional services sector, at 7 per cent, accounted for the most number of licenses in 2011 followed by the tourism sector at 5 per cent, the DED said in a statement.

“The strong economic performance in Dubai, as demonstrated by the high number of business licenses issued, was led by the visionary policies of the government. It also shows the high level of investor confidence in Dubai, chiefly on account of its leading economic role in the region and the world. One of DED’s strategic objectives is to create a suitable environment that retains Dubai as a destination of choice for investors,” HE Sami Al Qamzi, Director General of DED, said in a media statement.

“We always [sought] to attract investment and boost economic activity in Dubai by providing value-added services to investors and the business community,” added Al Qamzi.

Interestingly, Dubai’s unique status in the region means that it benefits from both turmoil as well as regional stability.

With an obvious improvement in the regional economy, intra-region investment flows are picking up once again, with Dubai being an obvious beneficiary. Wiser for having survived the 2008/09 meltdown, the UAE’s banks are now seen active in Dubai’s property market again, with recent reports pointing to an uptick in bank lending and mortgages.

Improved bank liquidity conditions and a gradually declining inter-bank lending rate means that the country’s financial institutions are once again flush with cash and are back in the business of offering loans, thanks to their comfortable capital adequacy levels.