Dubai Slowdown Prompts S&P to Lower Ratings of Two State Firms

(Bloomberg) -- Dubai’s economic downturn is starting to weigh on some of the emirate’s biggest state-linked companies.

S&P Global Ratings cut the credit worthiness of Dubai’s utility monopoly and a company that owns properties in Dubai’s financial center. Explaining its decision, S&P said it was concerned that Dubai’s deteriorating “credit conditions” may affect the ability to provide extraordinary support to state-related firms if needed.

The move is the latest sign that one of the most diversified economies in the Middle East is coming under pressure. Over the past year, real-estate prices have dropped and domestic demand has faltered, prompting the government to announce a series of measures to stimulate the economy.

And while Dubai has weathered the impact of the 2014 oil-price crash better than some of its energy-rich neighbors, S&P sees signs that the downward trend will likely continue until 2020. With population growth has outpaced economic expansion in recent years, income levels -- measured by gross domestic product per capita -- have fallen to $37,000 this year from a peak of $45,000 in 2013. It will likely drop to $36,000 in 2020, it said.

“We view this decline as an indicator of weakened macroeconomic fundamentals, as a country’s income level gives an indication of the potential tax and funding base for a government,” it said.

Dubai, the second-biggest sheikhdom in the United Arab Emirates, borrowed tens of billions of dollars to reduce its reliance on dwindling oil resources, positioning itself as a regional hub for trade, banking, tourism and transport.

It emerged from the brink of default during the 2009 global financial crisis with plans to embrace new technologies and develop new communities as it prepares to host the World Expo 2020.

Analysts don’t see a repeat of the 2009 crash. The International Monetary Fund in May said it expects Dubai’s economy to grow 3.4 percent in 2018 and above 4 percent in the following year, driven by spending related to Expo 2020.

But rising geopolitical risks -- the Saudi-led boycott of Qatar and the looming U.S. showdown with Iran -- as well as the introduction of value-added taxation and other levies in Saudi Arabia and the U.A.E. have weighed on consumer confidence.

An indicator of private-sector activity published by Emirates NBD, Dubai’s biggest bank, dropped in five out of the first eight months this year, with employment growth softening the most since at least 2010.

The U.A.E. federal government and regional sheikhdoms have announced a slew of measures this year to prop up the economy, including a decision to scrap the billions of dollars private businesses have to lay out to hire the foreign workers they depend on.

“A lot of the recent data has been fairly disappointing,” said Jason Tuvey, an emerging-market economist at Capital Economics in London. “We expected growth to pick up a little with recent measures but that has yet to filter through.”

S&P lowered the rating of Dubai Electricity & Water Authority, the emirate’s utility monopoly, by one level to BBB, two steps above junk, with a negative outlook. It also downgraded DIFC Investments LLC, which owns properties in Dubai’s tax-free financial center, to BBB- with a stable outlook.

The move “feels like a crystallization” of downturn concerns felt by investors for a while, said Hasif Murad, an investment manager at Kuala Lumpur-based Aberdeen Islamic Asset Management. “However, I don’t think this weakness or downturn cannot be managed.”

©2018 Bloomberg L.P.