The UAE's total external debt, both public and private, is expected to
continue rising sharply, increasing the external vulnerability of the
corporate and private sectors in the country, according to investment
bank UBS.
The bank, in its latest research on the UAE economy, cited estimates by
the Institute of International Finance (IIF), showing the country's
public and private foreign debt has risen sharply, from around $17
billion in 2003, or 19 per cent of GDP, to an estimated $106bn, or 55.7
per cent, in 2007.
"Of this, only a small part, perhaps $13bn, can be directly attributed
to the public sector, whereas the majority $93bn is owed by the
corporate sector, mainly by the UAE's banking sector. Many of the
companies that have taken on foreign debt have strong links with, or
are partly owned by, the public sector," the UBS report said.
"Given close links between the pubic and the private/corporate sector,
this will also imply a rise in contingent liabilities of the public
sector," it added.
According to the report, the UAE banking sector is the main external
borrower to expand the domestic credit growth. "UAE banks have
increased their foreign borrowing markedly in recent years and now
account for close to two-thirds of total foreign debt.
With the loan-to-deposit rate of the UAE banking sector around 100 per
cent and domestic deposit growth constrained by interest rates, banks
are increasingly dependent on foreign funding in order to expand
domestic credit growth," the report said.
However, the external funding situation for the UAE banking sector has
become somewhat more challenging due to the decline in support
conditions in international credit markets. Also, there was a rise in
foreign deposits apparently linked to the attempt by foreign entities
to profit from a potential revaluation of the dirham against the
dollar, the report said. This increased banks' foreign debt, it added.
"Foreign debt of the non-financial sector has also increased sharply in
the context of strong corporate expansion, particularly in Dubai. As
the IIF has pointed out, some of the debt comes in the form of private
equity deals and Islamic financing, which are harder to track, so
available data might understate the full extent of debt build-up in the
private sector," the report said.
The UBS report showed the public debt of the UAE Government was low,
but there are indicators of a continuous surge in contingent
liabilities. "Government debt has risen moderately in recent years,
reaching 10 per cent of GDP in 2007, according to the IMF.
The
estimate by the IIF is twice as high, at 21 per cent of GDP, reaching
$40bn, and includes some off-budget activity that is not captured by
the central government accounts."
The report showed the moderate rise in government debt made the UAE an
exception in the GCC, as debt ratios had declined elsewhere in the
region.
"Roughly two-thirds of government debt is owed to domestic entities, above all the local banking sector.
Only
one third, or around $12bn, is foreign debt. Public foreign debt is
small compared with the central bank's reserves, which reached $39.5bn,
and Abu Dhabi Investment Agency's (ADIA) foreign assets. This implies
that in net terms the UAE Government is a significant international
creditor," it added.
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