United Arab Emirates Country Update

Implications for Investors

• The outlook for political stability is bright, following the apparent resolution of a succession battle in the emirate of Ras al-Khaimah.
• Dubai has made progress toward addressing the debt troubles of state-owned conglomerates, most notably in the form of a deal to restructure nearly $25 billion of debts owed by Dubai World. Even so, some $18 billion of debt is due to mature in 2011, and while a successful bond issue in September 2010 suggests that the emirate will be able to refinance much of the total, especially troubled firms will face obstacles.
• A prime candidate for difficulties is Dubai Holding, a financial services unit of state-owned Dubai Group, which was forced to restructure a $550 million loan in December, after missing a payment the previous month. The weak real-estate market will continue to weigh on the finances of the firm, which is due to make a payment of $240 million in July.
• Recently approved legislation authorizes the federal government to issue debt and establishes a framework for a domestic bond market. Officials have indicated that the first federal-level bond might be issued before the end of 2011
• The federal government has pledged to implement the reforms required to obtain an emerging-market designation from MSCI, which is crucial to the UAE’s hopes of becoming a regional hub for equity investors. All three of the country’s bourses have announced plans to eliminate the dual-account systems currently in place, and are in talks to merge the exchanges.
• However, officials have conditioned moves to ease restrictions on foreign ownership in some sectors on the agreement of participants in the Doha Development Agenda, a free-trade initiative sponsored by the WTO, to reduce tariffs on the federation’s key exports, including petrochemicals and aluminum. Whether the necessary progress might be made before June, when the MSCI is due to issue its annual assessment, is debatable. Consequently, the odds that the UAE will be granted emerging-market status in 2011 are no better than even.