Dubai needs creativity to repay debt

THE GULF STORY

Selling some prized assets appears to be an easier option.

Dubai, one of seven members of the United Arab Emirates federation, and state-linked firms owe an estimated $80 billion of debt borrowed to fuel a boom, when Dubai branded itself as a tax-free destination for foreign workers and businesses.

Now, scrambling to rebuild its image after a $26 billion debt bombshell last month that was poorly managed, the emirate is unlikely to risk another public relations black eye by imposing taxes at this juncture. “Dubai is looking to keep attracting businesses,” said Hamad Bu Amim, Director-General of the Dubai Chamber of Commerce and Industry. “It is not the right time to introduce taxes. According to what’s on our radar, this is not happening in 2010.”

The emirate’s Budget Committee Chief, Dhahi Khalfan Tamim has said initial estimates indicate Dubai’s budget will be balanced, with any potential deficit lower than a projected 2009 deficit of 4.2 billion dirhams ($1.14 billion). The emirate is seen curbing infrastructure spending and last week it tightened control of government revenues, ordering all departments to transfer all revenues to the treasury.

Dubai sent shockwaves through global markets on November 25 when it said it needed to restructure $26 billion in debt linked to flagship firm Dubai World and its main property units. An elevanth hour bailout by Abu Dhabi helped stave off default on a $4.1 billion bond on December 14 but it still needs a standstill deal with creditors to let Dubai World restructure.

And while asset sales are on the cards, Dubai has to find new revenue sources at least to pay off its own debt.

“In the short term, such an announcement of taxes could have a big psychological effect within the community of foreign players in the country,” said Philippe Dauba-Pantanacce, senior economist at Standard Chartered bank in Dubai.

Revenue generators

One option for Dubai to generate revenues could be to raise government fees and charges or introduce more paid services similar to its road toll system, or business licensing fees, analysts say.  “These so-called ‘charges’ and ‘fees’ are in essence tax,” said Ehsan Khoman, a Dubai-based economist.

“While increasing these sort of indirect taxes during an economic downturn will be a bitter pill to swallow, it will be certainly be more accepted than an outright income tax.” Some, however, doubt such short-term fixes can work to pay off Dubai’s billions of dollars in debt.

“Increasing current charges and hidden taxes may generate revenue but will not get nearly close enough to covering the debt issues,” says Ghanem Nuseibeh, senior analyst at Political Capital consultancy.

In addition, analysts say hidden charges are counter-productive for the business environment in the long term. “If there is any reform it should be to consolidate the sources of revenues into one system rather than branching out to different revenue mechanisms,” said Dean Rolfe, Middle East tax leader at PricewaterhouseCoopers.
“The more systems there are the more complex it becomes for businesses to operate here,” he added. 

Dubai may be forced to continue its dependence on oil-rich fellow emirate Abu Dhabi, which has bailed the emirate out directly and, earlier this year, indirectly by way of two Abu Dhabi-listed banks and the central bank.

“Dubai will have to rely on support from Abu Dhabi, and possibly other states as well as selling of assets held by Dubai World,” said Nuseibeh. “A combination of both seems the only viable way out, given Abu Dhabi’s less than full-hearted support.”  Abu Dhabi’s move to assist its struggling neighbour with $10 billion in bonds came on the due date of a $4.1 billion sukuk issued by Nakheel, the property subsidiary of Dubai’s troubled conglomerate Dubai World.  Last month, Dubai raised $5 billion from two Abu Dhabi banks.

The UAE central bank had bought the Dubai’s government $10 billion worth of bonds in February.