IMF warns Dubai on debt, surging property prices
IMF warns Dubai on debt, surging property prices
Over-inflated Dubai real estate prices crashed by more than 50 percent in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world.
The economy and the property market are now recovering, but so strongly that the IMF worries another bubble could form — and because Dubai’s debt has continued to rise, it might have difficulty coping with fresh instability.
Harald Finger, IMF mission chief to the YAE, noted that by one commercial bank’s estimate, listed Dubai property prices soared 35 percent from a year ago in June.
“It is too early to speak of a bubble, but should price increases continue to take place at this pace, action will need to be taken to prevent a bubble,” he said after annual economic consultations between the IMF and the UAE.
Last year the UAE central bank tried to introduce caps on home mortgage lending as a way to head off another bubble, but suspended them after lobbying by commercial banks, which complained their business would suffer.
The central bank is now negotiating revised caps with the banks, but Finger said that because much home buying in the UAE was done with cash rather than mortgages, the mortgage rules would need to be complemented by other measures.
If property prices continue to surge, one suitable step might be introducing fees on real estate market activity, he told a media conference call.
However, Dubai’s business success has been built on a low-tax environment, and it is not clear whether the emirate would be willing to consider such a step.
Finger said he had discussed the idea of fees with Dubai officials, who had replied that they might be considered but would need careful coordination with the rest of the UAE to ensure that Dubai’s competitiveness was not damaged.
Dubai property developers, many of them linked to the government, have announced a string of massive real estate projects over the past nine months, including high-end housing, shopping malls and amusement parks — reminiscent of previous building crazes that included the construction of palm-shaped man-made islands and other high-profile projects.
The Al Bayan newspaper, a UAE publication, calculated that if they all went ahead, the projects would require total financing of over 666 billion dirhams ($180 billion).
Finger said that since Dubai’s government-linked enterprises (GREs) were still saddled with debt from the last crisis, they would need to tread carefully to avoid being vulnerable if another bout of volatility in global financial markets hit the emirate’s property sector.
“These projects increase business confidence, but they also call for prudent economic policies in order to prevent a possible build-up of a renewed boom-and-bust cycle in the UAE.”
In a report, the IMF said the total debt of the Dubai government and its GREs had risen $13 billion to $142 billion between March 2012 and April 2013, reaching 102 percent of the gross domestic product of Dubai and the UAE’s small northern emirates. Finger called that level “a source of concern.”
The government’s debt rose $4.5 billion as Emirates NBD, Dubai’s top bank, lent it more money.
The concentration of ENBD’s loans to the government is high, raising corporate governance and risk management concerns, the IMF said.
ENBD has said it is managing its loan book prudently and this month cut its estimate of non-performing loans this year because of a strengthening local economy.
The IMF estimates that about $64 billion of debt held by Dubai and the GREs will come due between 2014 and 2016, some of it the result of debt restructuring deals done in the wake of the last crisis.
A plunge in Dubai bond yields last year shows that financial markets believe the emirate will have little trouble repaying that debt. But the IMF said: “Although Dubai’s operating environment improved markedly, these large rollovers, particularly for the GREs, could still prove challenging.”
2 years on, Brexit vote has taken a toll on UK economy
- Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals
- The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum
LONDON: While it’s still unclear what Brexit will look like when it happens next year, the decision to leave has already had a clear effect on the economy: households are poorer, companies are more cautious about investing, and the property market has cooled.
In the two years since the vote to leave the European Union, Britain has gone from being a pace-setter among the world’s big economies to falling into the slow lane. And the uncertainty over what relations with the EU will be when Brexit becomes official on March 29, 2019 could make matters worse.
Prime Minister Theresa May’s Conservative government remains split on what those relations should be. There are those who favor a “hard Brexit,” a clean break that takes Britain out of the bloc’s free trade union but also gives it more freedom to strike new trade deals around the world. Others want to keep Britain as close as possible to the EU, Britain’s biggest trading partner, which could mean it has to obey more of the bloc’s rules.
Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals.
“Thousands of skilled, well-paid jobs are now on the line because of the shambolic mess the government have created over the Brexit negotiations,” said Darren Jones, the lawmaker for the community where Airbus has its plant.
Before the referendum of June 2016, the British economy had been one of the fastest-growing industrial economies for years. Now, it’s barely growing. In the first quarter of this year it expanded by just 0.1 percent from the previous three-month period, its slowest rate in about five years.
For most people, the first and most noticeable impact was the drop in the pound. The currency slid 15 percent after the vote in June 2016 to a post-1985 low of $1.21. That boosted prices by making imports and energy more expensive for consumers and companies — the rate of inflation hit a high of 3 percent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the UK But it hurt consumer spending and businesses that depend on their shopping. The retail industry was hit hard, with high-profile companies like Toys R Us and Maplin going bust, and supermarket chain Marks and Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 percent.
“After Brexit, prices definitely went up,” said Nagesh Balusu, manager of the Salt Whisky Bar and Dining Room in London. “We struggled a bit earlier this year, so now we’ve increased the prices.” The bar is next to Hyde Park, a popular destination for foreign visitors. “The tourists have a good exchange rate. They know they can spend a little bit more than they usually do. But the locals are coming a little less. They are starting to think about how much they spend.”
The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum.
The real estate market, meanwhile, has cooled considerably, with the number of property sales in London near a historic low last year, according to estate agent Foxtons.
While some foreign prospective buyers were attracted by the drop in the pound, others seem to have been scared off by uncertainty over what Brexit might mean for their investment.
House prices are stagnating after years of gains, also due to expectations that the Bank of England will keep gradually increasing interest rates.
Nic Budden, Foxton’s CEO, predicts that the real estate market will remain challenging this year, while Samuel Tombs, analyst at Pantheon Economics, predicts that house prices will flatline for the next 6 months.
Against the backdrop of uncertainty, businesses have become more reluctant to invest in big projects. Because Brexit could lead to tariffs on EU imports of British goods, companies are hesitant to spend big on British plants and office space before they know what the new rules will be.
Benoit Rochet, the deputy chief of the port of Calais, the French town across the Channel from Britain, complained to a parliamentary committee this month that “we know there is Brexit but we don’t know exactly what Brexit means.”
“You are not alone,” responded the Conservative chair of the committee, Nicky Morgan.