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First with Financial Comment from Arabia

Unfreezing of UAE public sector credit just one step forward

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Abu-Dhabi-Ferrari-Theme-ParkIn the aftermath of the sudden-stop syndrome that hit the UAE economy last autumn even credit for blue-chip public sector entities froze up. That is now ending.

Yesterday the Abu Dhabi Water and Electricity Authority announced that it had closed a $2.2 billion funding for the 1,507MW, 100 million gallon per day, Shuweihat S2 water and electricity power generation project.

Tough terms?

Shuweihat S2 was awarded to Suez of France and Japan’s Marubeni last year and the Ruwais Power Company formed which is 60 per cent owned by Adwea and 40 per cent by the foreign companies.

The tenor of the financing runs to 22 years but there were no details of the banks involved or the terms of the funding. That might be read as an indication of a high degree of state subsidy or very tough terms.

One of the problems for the GCC states is that despite their undeniably strong hydrocarbon reserves they have run up a great deal of debt during the oil boom of the past few years.

Standard Chartered Bank estimates external debt-to-GDP ratios of 50-60 per cent in the UAE and Qatar, and seven per cent for Saudi Arabia and 22 per cent for Kuwait. Around $100 billion has been raised in the bond markets by sovereigns, companies and banks.

As Gulf News reports today $33 billion in bonds and loans will come up for repayment before the end of next year, and over half of that amount from the UAE. Unless oil revenues surge due to higher prices this will squeeze cash flow next year, even though the UAE has external assets more than three times its external debt.

Debt burden

Therefore, the debts run up during the oil boom are likely to depress economic activity in the UAE, and to a lesser extent in the other Gulf States, for some time. And while it is a good sign that credit is flowing again in parts of the public sector this improvement is only relative and a return to the boom years is far off.

All eyes are on Dubai and its $85 billion debt mountain. So far all repayments have been made on schedule, and a $20 billion bond program established as a lifeline, so far only with the UAE Central Bank as a subscriber.

This is a world away from the emerging market experts in the West who are convinced that the Gulf States are among the engines of growth for the next couple of years. These economies will continue to develop but at a slower pace, apart from Qatar (see this article).

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Written by Peter Cooper

October 20, 2009 at 9:32 am

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