Since 2009, the federation government has grappled with difficulties stemming from a debt crisis in Dubai and the threat of internal unrest amid the Arab Spring in 2011. To all appearances, the emirs have met those twin challenges with success. The wave of rebellion that swept across the region largely bypassed the UAE. It was kept at bay by generous social spending rather than political concessions.

Likewise, Dubai’s debt problems, although not completely resolved, have been addressed to enough of an extent as to convince investors and creditors to move forward on some of the ambitious projects that were put on hold at the height of the debt crisis.

Both of these major challenges brought an added sense of urgency to a long-standing program of private-sector expansion and diversification aimed at reducing the emirates’ vulnerability due to a plunge in global oil prices. Toward that end, the federal government has implemented reforms designed to deepen the local capital markets, an effort that was rewarded in June by MSCI, which announced that it will upgrade UAE to the status of “emerging market” beginning in May 2014.

Managers of MSCI-based funds are expected to add local stocks to their portfolios as a result of the upgrade. This could prompt foreign investors more generally to take a closer look at opportunities in the UAE.

Payments on Dubai’s restructured loans will be large in 2015–2016, and a $20 billion loan backed by Abu Dhabi is scheduled to be repaid in 2014. Total debt payments falling due in 2013–2017 are estimated at $60 billion. The assumption is that the $20 billion loan will be rolled over, at which point the emirate’s government-related entities (GREs) will be able to finance debt repayment with new reasonably priced loans.

However, there remains a risk of further problems down the road.

Proceeds from the sale of assets belonging to the larger GREs, including Dubai World and the Nakheel Group, were expected to help cover the cost of debt repayment, but the income from that source has been disappointing thus far. At the same time, a recovery of the real-estate market has brought renewed momentum to development plans, prompting GREs to take out fresh loans that have boosted the overall debt of the quasi-state entities by more than 10 percent to $93 billion since March 2012.

Volatility in property prices could leave Dubai vulnerable to a second debt crisis.

The IMF has expressed concern that volatility in property prices could leave Dubai vulnerable to a second debt crisis. With that danger in mind, the federal government proposed the establishment of caps on mortgage lending and bank loans to GREs, but the plan has been put on hold following protests by lenders.

The uncertainty surrounding Dubai’s ability to steer clear of further debt troubles, which has been heightened by the potential for a rapid pullout of investment capital in response to a clear signal that the U.S. is preparing to rein in its program of rapid monetary expansion, creates a risk of economic instability beyond the current year. However, the near-term prospects are bright, as the economy is continuing to expand at a relatively strong pace, even as growth of government spending has decelerated, following a period of very rapid expansion.

About The Author The PRS Group

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