Concerns about Dubai’s potentially crippling default on enormous debts to global creditors have rattled investor confidence across the oil-exporting Gulf region but Abu Dhabi will come to the rescue, says a leading economist in the region.
Earlier this year, the UAE central bank, based in Abu Dhabi, subscribed for $10 billion in Dubai sovereign bonds, a portion of which went toward enabling state-linked developers pay outstanding dues to contractors.
John Sfakianakis, Chief Economist at Banque Saudi Fransi — Credit Agricole Group, said Abu Dhabi is bound to suffer from the contagion from Dubai in the short-term, but the United Arab Emirates capital will be in a position to overcome any risk profile pressure.
“Abu Dhabi controls 90 per cent of the UAE’s oil reserves which are the fourth largest in the world. Despite the global financial crisis, the Abu Dhabi Investment Fund is one of the world’s largest sovereign wealth funds.
“Clearly, we think Abu Dhabi’s investment programme and low key leadership offers reasonable reassurances about the country’s direction to avoid far fewer excesses,” Mr. Sfakianakis said in a statement.
He said credit quality deterioration simply is not an issue in Abu Dhabi, Qatar and Saudi Arabia, and “we expect that in the short term, investors will calm down and begin to differentiate between ‘good’ and ‘bad’ bets in the Gulf region.”
The Dubai debt debacle comes shortly after Qatar, the world’s top exporter of liquefied natural gas, sold $7 billion in bonds this month, subscribed mainly by investors in the United States and the United Kingdom.
Mr. Sfakianakis said global investors in future will need to differentiate between those Gulf economies that are debt-burdened and those whose leverage levels are incredibly low by global standards.
“Saudi Arabia, the world’s biggest oil exporter, has among the lowest levels of public debt in the G20, with domestic debt levels at 13.4 per cent of GDP last year, compared with 81 per cent in India and 50 per cent in the U.S.
“It also holds enormous foreign assets of 1.46 trillion Saudi riyals at the end of October, most of which is invested in low-risk, liquid investments.”
He said once the dust settles, there will be a flight to quality, with foreign funds favouring Saudi Arabia, Qatar and Abu Dhabi.