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Same-Day Analysis
Dubai Moves to Slash Government Spending
Published: 3/3/2010
IHS Global Insight Perspective | |
Significance | The crisis-struck U.A.E. emirate of Dubai has ordered government departments to cut spending by 15% in 2010, producing cost savings of 3.7 billion dirhams (US$1 billion) which could then be used to reduce this year's budget deficit. Dubai's 2010 state budget projects a shortfall of 6 billion dirhams (2% of GDP) this year. |
Implications | Although the state budget passed in January remains unchanged, the Dubai government looks to trim expenditures through planned efficiency measures. With the cost cutting, the authorities look to place Dubai's government finances on better ground and eventually return the fiscal balance to surplus. |
Outlook | Dubai's fiscal balance is expected to remain in the red for 2010, as government revenues again edge lower given the slumping economic activity in the crisis-struck emirate. The Dubai government will rely on cost-savings measures, as well as the financial support from its oil-rich neighbor Abu Dhabi, to manage through the economic and financial difficulties in 2010. |
The Dubai government earlier this week issued orders to all branches of the government to trim spending by 15% in 2010 in order to reduce this year's budgetary shortfall. Given the financial difficulties facing the crisis-struck emirate, Dubai authorities hope to save an additional 3.7 billion dirhams (US$1 billion) by trimming expenditures through planned efficiency measures. Spending was already reduced by 6% under the 2010 budget, mainly as a result of infrastructure projects reaching completion, but Dubai has moved for further cost cutting to place the emirate's finances on better ground. A spokesperson for the Department of Finance noted, however, that the state budget remained unchanged. The Supreme Fiscal Committee (SFC) is reportedly working on a budget plan for 2011-13 and hopes the additional austerity measures—in combination with the revenue gains expected from the new Dubai Metro, the Salik toll-road system, and other infrastructure projects—will return Dubai's fiscal balance back to surplus over the medium term.
The Dubai economy was hit hard in 2009 by the credit crunch and economic downturn, and recovery prospects look poor given the negative aftershock of the property crash. As such, Dubai has ordered the treasury to collect all revenues from government departments under the 2010 budget and has relied heavily on the support from the federal government, namely Abu Dhabi, to help manage through its current debt problems. Cash-strapped conglomerate Dubai World's announcement last November that it would seek a debt standstill agreement rocked financial markets and damaged consumer and investor confidence, prompting oil-rich Abu Dhabi to again step in and bail out its crisis-struck neighbour. With its latest US$10-billion bond purchase from Dubai, Abu Dhabi has provided US$20 billion in support to the Dubai government.
Funded by the US$20-billion bond program, Dubai has used its Financial Support Fund to help government and government-related entities to roll over maturing debt and meet their payment needs amid the crisis. The Dubai government has reportedly disbursed through the fund US$6.2 billion in support to the financially distressed state-owned conglomerate Dubai World. Dubai World has yet to make an announcement on a standstill agreement that would allow the company to restructure around US$22-billion in debt, but it has reportedly been meeting with creditors to work out a deal. Given the magnitude and urgency of Dubai World's cash flow problems, it will likely need to restructure its debt and receive government support, as well as sell some of its assets to get over its short-term liquidity crunch. The conglomerate's investment arm Istithmar World has recently sold its stake in Indian budget carrier SpiceJet. However, some of its subsidiaries such as the port-operator DP World are deemed to be in better financial health than others like the troubled real-estate company Nakheel.
Outlook and Implications
Dubai's fiscal balance is expected to remain in the red for 2010, as government revenues again edge lower given the slumping economic activity in the crisis-struck emirate. The Dubai government will rely on cost-savings measures, as well as the financial support from its oil-rich neighbor Abu Dhabi, to manage through the economic and financial difficulties in 2010. Authorities are in the process of sorting out which of Dubai World assets are economically viable and which are not in order to place the company and the emirate back on a sustainable growth path. Credit remains tight however, and ratings agencies are taking a closer look and re-evaluating the implicit sovereign support placed on many of these state-owned companies. Dubai's government and government-related entities, especially in the real-estate market, may therefore have to rely on the state for assistance to roll over maturing debt and to meet their payment needs. To be sure, the cost of insuring Dubai debt, as measured in the credit default swap market, spiked higher following Dubai World's debt standstill announcement, and remains elevated at around 600 basis points, meaning it might prove too costly to tap market sources for financing. Dubai Electricity and Water Authority looks set to be the first to test the waters, gauging interest in its planned US$1-1.5 billion bond sale over the coming month. DEWA pushed the sale back to the second quarter of 2010 due to poor market conditions in the early part of the year.Most Viewed Articles
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