UAE foreign debt up 55.7% to hit $106bn

 

The UAE’s total external debt, both public and private, is expected to continue rising sharply, increasing the external vulnerability of the corporate and private sectors in the country, according to investment bank UBS.

 

The bank, in its latest research on the UAE economy, cited estimates by the Institute of International Finance (IIF), showing the country’s public and private foreign debt has risen sharply, from around $17 billion in 2003, or 19 per cent of GDP, to an estimated $106bn, or 55.7 per cent, in 2007.

 

“Of this, only a small part, perhaps $13bn, can be directly attributed to the public sector, whereas the majority – $93bn – is owed by the corporate sector, mainly by the UAE’s banking sector. Many of the companies that have taken on foreign debt have strong links with, or are partly owned by, the public sector,” the UBS report said.

 

“Given close links between the pubic and the private/corporate sector, this will also imply a rise in contingent liabilities of the public sector,” it added.

 

According to the report, the UAE banking sector is the main external borrower to expand the domestic credit growth. “UAE banks have increased their foreign borrowing markedly in recent years and now account for close to two-thirds of total foreign debt.

 

With the loan-to-deposit rate of the UAE banking sector around 100 per cent and domestic deposit growth constrained by interest rates, banks are increasingly dependent on foreign funding in order to expand domestic credit growth,” the report said.

 

However, the external funding situation for the UAE banking sector has become somewhat more challenging due to the decline in support conditions in international credit markets. Also, there was a rise in foreign deposits apparently linked to the attempt by foreign entities to profit from a potential revaluation of the dirham against the dollar, the report said. This increased banks’ foreign debt, it added.

 

“Foreign debt of the non-financial sector has also increased sharply in the context of strong corporate expansion, particularly in Dubai. As the IIF has pointed out, some of the debt comes in the form of private equity deals and Islamic financing, which are harder to track, so available data might understate the full extent of debt build-up in the private sector,” the report said.

 

The UBS report showed the public debt of the UAE Government was low, but there are indicators of a continuous surge in contingent liabilities. “Government debt has risen moderately in recent years, reaching 10 per cent of GDP in 2007, according to the IMF.

The estimate by the IIF is twice as high, at 21 per cent of GDP, reaching $40bn, and includes some off-budget activity that is not captured by the central government accounts.”

 

The report showed the moderate rise in government debt made the UAE an exception in the GCC, as debt ratios had declined elsewhere in the region.

“Roughly two-thirds of government debt is owed to domestic entities, above all the local banking sector. Only one third, or around $12bn, is foreign debt. Public foreign debt is small compared with the central bank’s reserves, which reached $39.5bn, and Abu Dhabi Investment Agency’s (ADIA) foreign assets. This implies that in net terms the UAE Government is a significant international creditor,” it added.