By Alexander H. Maurice.
The setting sun reveals a long shadow behind the skyscrapers of Dubai. A city burdened by debt, it will need a new strategy to escape the lingering effects of the 2009 recession. Its hope in reclaiming its image as a jewel of the Middle East lies with the World Expo in 2020, but first it must tackle the human rights issues of its migrant labor force.
In March of this year, the United Arab Emirates Central Bank and the UAE capital city, Abu Dhabi, announced that they would refinance $20 billion of the $35 billion debt owed to or guaranteed by the government. This ‘rollover’ gives Dubai another five years to repay a portion of its debt on favorable terms. It is a lifeline for the debt-laden desert oasis, but five years from now, Dubai will be on the eve of the World Expo. The small emirate faces the challenge of reducing its deficit during this brief window of opportunity. In five years’ time, will Dubai be back in the same situation it was in 2009? Or is Dubai willing to turn a new leaf in fiscal policy? In the rapidly changing city of Dubai, five years can be a lifetime.
Thirty years ago there were only nine skyscrapers rising above the dusty landscape in Dubai. Now, over 900 have been built on the backs of an inexpensive migrant workforce. Time flies in Dubai, or at least it did until the financial crash struck in 2009. The bailout Dubai received from the UAE central bank and Abu Dhabi softened the blow of its real estate market collapse. The recent rollover comes as a second boon to the gulf oasis struggling to establish itself as a regional financial, commercial, and recreational center.
The refinancing package offered by UAE central bank and Abu Dhabi gives Dubai another five years to repay $20 billion of their debt at an annual interest rate of 1 percent. This is good news for the short term, but according to the International Monetary Fund, Dubai owes a total of over $142 billion. This figure puts Dubai’s debt at over 102 percent of its regional GDP . Though Dubai is an emirate within the UAE, this percent of debt-to-GDP would put it among the worst 10 nations in the world compared by the IMF.
Investors seek out countries with as low a debt-to-GDP ratio as possible: the lower it is, the more likely that the country will be able to repay its outstanding loans. A high ratio thus increases the government’s bond yields and borrowing costs. While Dubai’s recent rollover offers it more time to shore up its finances, it only pushes back the impending burden, while debt continues to rise. This is a real problem for an emirate built up on the promise of a financial and commercial marketplace without any oil revenues of its own. As preparations for the World Expo get underway, policymakers are …
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