A recent Bank of America Merrill Lynch (BofAML) reported valuation and risk outlooks for Abu Dhabi, and Dubai and gave the two an ‘Underweight’ recommendation.
BofAML has an Underweight recommendation on Abu Dhabi’s external debt (EXD). Abu Dhabi’s external debt is tightly held due to its scarcity value.
The sovereign’s balance sheet remains robust nevertheless, with a large stock of foreign assets, despite fiscal deterioration.
Downside risks are a prolonged period of low oil prices, regional geopolitical threats and inability to implement sufficient fiscal consolidation.
Upside risks are a rebound in oil prices, improved local liquidity and more vigorous fiscal consolidation to slow drawdown of foreign assets.
BofAML has an Underweight recommendation on Dubai EXD. They find Dubai’s EXD at tight spreads given still-high leverage and refinancing challenges, but the global backdrop suggests a continued muddle through in terms of Dubai Inc. debt rollovers.
Although BofAML expects the local bid on the shorter end to weaken due to low oil prices, there is less supply risk than in GCC countries.
Downside risks include a prolonged period of low oil prices, regional geopolitical threats, a loss of competitiveness due to a stronger USD, material domestic liquidity tightening, a real estate collapse, increased borrowing for projects with low return and global risk aversion, which may cut market access to Dubai Inc. Upside risks are the Iran-P5+1 Deal, which could boost trade activity in Dubai.