Dubai default risk plunges 60% from peak

The cost of insuring five-year Dubai debt against default fell to around 400 basis points (bp) this morning as the emirate’s corporates, supported by its government, steadily chip away the debt.

Dubai’s five-year credit default swaps (CDS) have dropped around 100bp in the past six months to 406bp this morning, according to CMA DataVision’s Sovereign Risk Monitor.

Spreads on Dubai’s five-year CDS soared to nearly 1,000bp in February 2009, as investors grew increasingly concerned about the government’s willingness to meet the repayment schedule in 2009-10, particularly in quasi-sovereign debt.

However, with a successful debt restructuring of Dubai World in 2010 and the recent announcements regarding Dubai Holding's $555m debt restructuring and on-schedule payment for its $750m Sukuk by real estate giant Nakheel, investor confidence has made a cautious comeback and the fear of default has sharply receded.

Recent indicators suggest that a number of sectors are already stabilising, and Dubai’s economy appears well positioned to take advantage of the recovery predicted for this year.

Although it might take several years for real estate to recover, there has been promising growth in Dubai’s services sectors (ports, tourism and financial services).

Dubai’s total trade grew 20 per cent year-on-year to Dh661.26bn for the first three quarters of 2010, compared with Dh551.57bn during the same period of 2009, according to numbers published by the Dubai Statistics Centre.

Similarly, the number of hotel visitors in the emirate, the most popular tourist destination in the Middle East, grew by almost 6 per cent in the first nine months of the year to 5.9m compared with 5.6m guests during the same period last year, according to the Dubai Department of Tourism and Commerce Marketing.

In the same period, the number of hotel rooms and hotel apartments in Dubai witnessed an increase of 16 per cent, from 59,372 rooms and hotel apartments in the first three quarters of 2009 to 68,654 at the end of September 2010.

In addition, the number of hotels operating in Dubai reached 565 in the first three quarters of 2010 compared with 533 in the same period off 2009 – an increase of 6 per cent.

Dubai CDS are now hovering just above the 385bp levels of November 2008, before the government announced a standstill on debt held by Dubai World.

CDS are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.

Despite the recent steady decline in the Dubai CDS rate, analysts believe that the rate remains high in comparison with some of the other global sovereigns.
 

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