In December the Dubai government announced its removal of
guarantees from Dubai World as the group sought a debt standstill from its
creditors and those of its property arm, Nakheel, and was forced to restructure
its liabilities. Moody’s
puts the total debt burden now being carried by the two around $9bn and says
that several of the other operating companies linked to the emirate may go the
same way in 2010 if financial assistance is not forthcoming.
While it does not think that a sovereign default in Dubai would put other
economies at risk – and adds that the debts in question in this case are public
sector, rather than sovereign – Moody’s says that the move signifies the start
of a withdrawal of government support for flagging companies across other
nations. “What is happening in Dubai may be the beginning of the ‘exit
strategies’ that have led to some anxiety among investors,” says Pierre
Cailleteau, managing director of the sovereign risk group at Moody’s.
“After a period of unprecedented full blanket guarantees, we will be seeing
the return to some ‘normality’, either because government finances cannot afford
other general bailouts or because they think this is not a healthy use of
taxpayer’s money. The normalisation process will be a bumpy ride – a main theme
for 2010,” Cailleteau adds.
“Therefore, there are many reasons to look at large government debt in the
advanced world in particular, irrespective of what happens in Dubai.”
The Dubai World default does not present a contagion risk for other sovereign
states globally, Moody’s says, a question raised when the UK’s prized AAA+
rating came under threat of downgrade in December, on fears it won’t be able to
service the fiscal deficit by 2013. But the scare does “act as a reminder that
some governments have stretched their balance sheets beyond comfortable levels
during the crisis,” Moody’s Cailleteau adds. “[It] also presages that 2010 is
likely to see more bouts of volatility as governments start implementing exit
strategies from their protective policies.”
Moody’s stops short of junking the emirate’s investments adding there are
still elements of the Dubai empire that can stand alone as viable successful
entities independent of government support.