IMF: Dubai World debt deal to have delayed effect

Dubai World sought restructuring last November

Dubai’s postponement of its US $24.8 billion debt payoff may have a lasting effect on the economy though not “for some time”, according to the latest World Economic Outlook report from the International Monetary Fund.

The IMF report has highlighted that “a possible re-pricing of quasi pricing sovereign debt” may be generally damaging for many sectors as international creditors back away from the region.

Last November Dubai World announced that it sought to restructure its debts following defaults of two of its subsidiaries, including Nakheel, which had a detrimental effect on Dubai’s construction sector.

Dubai World has since secured most of the US $9.5 billion injection from the emirate – as well as a cash injection indirectly from Abu Dhabi - to pay Nakheel’s Islamic bonds to international creditors that mature this year and in 2011, as well as paying banks in five- and eight-year debt tranches.

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However, the fund said the government bail-outs will “remain in place to help cement the recovery”, though it had concerns that such injections are not translating into flowing credit lines.

Dubai’s economy reduced by 2.5% last year, according to IMF figures, and the fund forecasts that the country will grow 1.3%, weighed down partly by the property sector. Saudi Arabia, by contrast, will grow to 3.7% in2010, up from 0.1%, with the Middle East-North Africa region expanding by 4.5%.

Earlier today the Dubai Chamber of Commerce & Industry posited that despite the difficult economic circumstances, the emirate’s underlying strengths remain intact.

It argues that government investment in the last few years into infrastructure and utilities will start to pay dividends for the long term “as it is those investments that will increase productive capacity, enhance productivity growth and develop innovation throughout all sectors of the economy”.

It adds that the upheaval gives Dubai the chance to review fundamentals, explore opportunities, adapt to consumer tastes and specialize on core business activities.

It also recommended a series of policy recommendations to ‘enhance the investment environment.

These include a continued Keynesian investment in infrastructure; a revival of Free Trade Agreement’s (FTA’s) that can bolster new trade opportunities; engagement with the private sector both domestically in order to specialise and adapt to new consumer requirements and internationally by boosting business; a faster process for implementing new laws and amendments to existing legislations that will encourage investments and boost growth.

It concludes that public-private partnerships “will not only provide the government with a mechanism for financing but also much needed public infrastructure at lower costs and high quality outcomes”.