Tuesday, January 19, 2010

Is Dubai Inc's debt really $170 billion?

The EFG Hermes report that suggested that Dubai Inc, implying all government related enterprises (GRE) and direct government debt could add up to between US$ 130-170 billion opens up a discussion in ones mind. The report suggests that the current known debt of $96.6 billion could be higher on account of the bilateral loans with local banks. It even cites the possibility that EmiratesNBD bank might have an exposure of $24 billion to Dubai Inc. This prompted me to check the balance sheet of the bank and to glean through the information known in the market and reported from time to time. The related party exposure shown at end of September 2009 in the balance sheet shows DH 45 billion (not dollars) due from possibly Dubai Inc as a whole, and there are deposits etc of about Dh 7 billion. I cannot therefore understand how such an assertion can me made. The entire loan book of the bank is US$ 53 billion of which just retail lending is $ 6.56 billion and then there is the trade finance and corporate lending, which when is adjusted to the over all loan book, by reason of deduction can only end up with the Dubai Inc exposure as $12 billion or so.

In addition, the local banks also have have massive deposits from the government entities and this is a major part of their float that comes to them and is a key part of the interest margin that they earn.

At the time of the Dubai World announcement in November 2009 the total debt estimated, which includes obligations to suppliers and contractors, was around $82 billion. Yes new obligations were taken with the Central Bank and the recent Abu Dhabi assistance which would not, in theory change the position of the over all obligation. Assume that of the $25 billion raised from the Central Bank and the Abu Dhabi assistance, about 75% was used to retire debt and the balance kept in reserve for operations or other maturing obligations, then even the net effect would be that the obligations would go up to US$88 billion.

How this can suddenly be considered a having increased to US$130-170 billion is baffling to me. I have always assessed that of the $82 billion about $60 billion is bank loans or bonds issued in the market and the balance $ 22 billion is creditors like consultants, contractors and service providers. A number of these creditors had either agreed or willing to agree to a reduction in their amounts in exchange for a definite payment plan.

I can buy the argument that if all the grandiose plans that were underway in Dubai were to continue at the same pace as they were in the early part of 2008 then indeed one can argue that the debt obligations of Dubai Inc would have mushroomed. Whether they would have been to the extent of $130-170 billion is a moot question. Intersestingly a couple of weeks back EFG Hermes published a report on the UAE banks and had made not any mention of the assertion that is being made today! So what information has come to light that would prompt this sort of assessment?

I am not suggesting that the research analysts at this reputable bank are being malicious but I do feel, very strongly, that issuing blase' statements is not conducive to the functions of a research analyst. After all we are not talking of an increase of say 10% which can be said to have happened in the normal course of business. In effect the suggestion is that the exposure to Dubai Inc is well over 120% more than was known to them or the market a few weeks back. This is where I think there are two options when I read such reports, a. press the delete button, or b. apply some common sense (which could be uncommon these days) and see is there any logic to this sort of thinking.

Clearly I took the second course. However, this asserts my position a few weeks back that it is time that a white paper is issued by Dubai Inc on the debts, the assets and that will clear up the air. This has, willy nilly, become a public matter through the way such reports have emerged in the media. This therefore needs a clear and coherent response from the right circles. I agree that bloggers like me can only speculate on the matter at hand, but we can use logic.

In a nutshell I find the nature of this report on the debt from EFG Hermes to be speculative in nature and I do believe that they owe it to the audience to explain themselves. Simply to assert that this could well be on account of bilateral loans from the banks which might not be reported is a rather serious accusation. I would presume the UAE Central Bank and the Auditors of the banks, all of whom are well reputed professionals, could hardly have sat by quietly eating their homous oblivious to any new lending spree in to Dubai Inc. I am in the consulting business and know for sure that new debt of Dubai Inc or most even well known companies is not on offer these days. Banks have hunkered down and just preserving themselves for the moment (not necessarily the best strategy in my opinion) but nevertheless that is how it is.

Ofcourse when the year end balance sheets come out in a few weeks time we will know for sure what the final verdict is. Till then I will reserve judgment and simply say that this report needs validation, and EFG Hermes may have got this one wrong.


Rupert Neil Bumfrey said...

Why doubt the resources of EFG-Hermes, Monika Malik is renowned for the excellence of her output?

UBS were one of the first, last September I recall, to raise the amount of leverage that the children in the sweet shop (aka as Dubai Inc executives) had exposed Dubai Emirate to.

As no apparent restructuring took place after the first tranche of $10bn was subscribed to by UAE Central Bank in February 2009, I think now is the time for Dubai Inc to be 100% transparent, or else this conjecture will just continue!

What fate awaits the likes of Jackson and O'Donnell, along with their many imported cohorts, who were the chief executors of the failure?

Anwer Sher said...

I am not at all doubting Monika Malik, she is a first class analyst, I am merely suggesting that she should have corroborated her assertion on the amount of the debt rather than simply make a statement.