Wednesday, September 30, 2020
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Dubai’s chance to rework financial commitments

With the issue of who would host Expo 2020 having been settled in Dubai’s favour, the focus has shifted to the tangible – and intangible — benefits the show will bring the host city. No one is in doubt that the multiplier effects of the huge infrastructure build-up required for holding such a mega-event will bring substantial prosperity and impetus to the local economy during the pre- and post-phases of the landmark show.

In general, experience from past expos has shown that the direct revenue generation from hosting the event would be more or less similar to the investments required for creating the necessary infrastructure, with maybe a billion or two ending up on either side of the equation. That need not, however, be the case with Dubai.

Given Dubai’s track record in optimising advantages from similar events, Expo 2020 will most likely bring much more benefits to the city and the region compared to what Shanghai in China, Yeosu in South Korea or Zargoz in Spain — venues for the past three editions of the global exposition — managed to do.

Dubai has perhaps already reaped the biggest benefit by effectively using the bidding process and the successful vote to overturn the negative international publicity for a humiliating debt crisis and prove its resilience to the outside world. The goodwill generated by the bid’s success is in fact helping Dubai to turn the negativity about its debt problem into a positive that will have far-reaching implications for both the build-up as well as successful conduct of the event, apart from its economic and developmental potential.

The international media, which has been quite strident in its criticism of Dubai for overreaching in its goals and ambitions following the 2009 crisis and its aftermath, is now citing the debt issue to argue that the city state is no longer a write-off candidate and is once again showing admiration for the way Dubai handles its affairs.

This positive turn will prove extremely handy when it comes to tying up resources for infrastructure for the 2020 event. According to a Deutsche Bank estimate, the infrastructure and allied facilities would cost about $43 billion and much of this will have to be raised through borrowing. Dubai government sources have already hinted about a major debt raising plan to fund the resources required for the Expo, most preferably in the form of Islamic bonds.

This will be in addition to the huge debt repayment obligations that will become due between now and the holding of the Expo. According to IMF estimates, an estimated $85 billion will become due for repayment by 2017.

The upcoming maturities include $20 billion borrowed from the UAE Central Bank to avert default in the wake of the financial crisis and the property market crash in 2008. This in turn means there would be need for significant re-rolling in managing the debt as well as raising new debt.

Considering the role of market sentiments in determining the cost of borrowing, goodwill created by the successful vote is going to be crucial in creating conditions that will facilitate tying up resources for ambitious plans that have already been announced or in the pipeline as part of the infrastructure to be created.

Thanks to a number of positive developments, including the renewed focus on Dubai’s safe haven status amidst the regional political turmoil, credit swap rates for Dubai’s debt have tightened significantly. This helped the indebted government entities to refinance their debt on more favourable terms.

The potential growth spillover from hosting of the Expo are expected to help government entities accumulate additional debt to fund the required capital expenditure. The extent to which positive market sentiments can help this process cannot be overemphasised. This is Dubai’s biggest achievement from its successful bid.

— The writer is a journalist based in Dubai