Abu Dhabi seeks to avoid Dubai-style debt crisis

An official document clarifying ultimate responsibility for new debt issuance by Abu Dhabi’s government-related entities aims to eliminate any risk of a Dubai-style debt crisis in the emirate.

The document introduces centralised mechanisms to manage debt and restraints on borrowing by quasi-sovereign bodies. But it does not change the level of state support available to Abu Dhabi’s key development vehicles, bankers and analysts said.

The document, dated August 7 and delivered to state-owned entities by the Executive Council, which assists the ruler of Abu Dhabi, says the government will only be responsible for debt formally guaranteed by the council or Abu Dhabi law if the borrower is unable to meet its obligations.

Entities obtaining a council guarantee must obey financial standards and report their performance against them to the emirate’s Department of Finance on a half-yearly basis.

However, the document added, the Executive Council has the ultimate say over all debt issuance, and can issue a guarantee even if an entity’s finances do not meet the targets.

Major government-related entities (GREs) in Abu Dhabi include Mubadala Development Co, International Petroleum Investment Co and Abu Dhabi National Energy Co.

These firms have ramped up their public borrowing in recent years as part of an expansion drive aimed at diversifying Abu Dhabi’s oil-dominated economy, which has seen them take stakes in the likes of Daimler and UniCredit among other investments.

Overall GRE debt in the UAE stood at $185bn or 51 percent of gross domestic product last year, with Abu Dhabi accounting for over 54 percent of the total, the International Monetary Fund said in May.

The document says annual debt issuance from Abu Dhabi, which sits on 7 percent of the world’s proven oil reserves, and its GREs should not exceed 5 percent of expected nominal GDP.

But while the document, first revealed in the Financial Times on October 23, prioritises the role of the Executive Council, it does not significantly change investors’ view of the level of government support for GREs, bankers and analysts said.

“Abu Dhabi’s four major state-owned enterprises…are essentially unaffected by the emirate’s recently approved public debt policy,” Fitch Ratings said in a report on Wednesday.

It added that the document was in line with previous statements offering broad and continued state support to Mubadala, IPIC, TAQA and Tourism Development & Investment Co.

Prices of outstanding Abu Dhabi state-linked bonds have not moved significantly since news of the document emerged as investors aren’t worried about it, said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi.

The document’s main function is to clarify aspects of debt issuance, and particularly the role of Abu Dhabi’s fledgling Debt Management Office, which is tasked with ensuring public debt is managed at sensible levels and that any entity issuing bonds does so in line with the emirate’s wider strategy.

“It is clear that some solid governance procedures are being introduced to avoid any future ambiguity of credit risk within Abu Dhabi,” said a senior debt banker in Abu Dhabi.

Such planning has grown in importance ever since Dubai’s 2009 debt crisis, which required Abu Dhabi to bail out its neighbour and caused the restructuring of billions of dollars of debt. This damaged the reputations of Dubai and the United Arab Emirates, of which Abu Dhabi is the largest member.

Abu Dhabi is cautious about debt risks, so the issue of the document “was expected sooner or later after what happened in Dubai”, said an official at one Abu Dhabi state entity.

In the longer term, however, the document underlines that Abu Dhabi sees its GREs operating as financially independent companies.

“This document does make the GREs more conscious of the fact they need to stand on their own feet, and that the government is willing to rein in control over debt issuance to avoid debt levels spiralling out of control,” Bhogaita said.


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