Abu Dhabi Government Expects Budget Deficit to Drop in 2010 as It Reviews and Cuts Back on Some Projects

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(ABU DHABI, UAE) -- Figuring out the budget deficit of Abu Dhabi involves reading the signs because the number is not  announced officially. It has to be pieced together from clues in documents. The current document that everyone is trying to decipher is the prospectus for a future bond sale by Waha Capital, an aircraft leasing and investment firm.

The prospectus was released in the third week of July. Since then local newspapers and financial news services have tried to read between the lines and come up with some numbers. Getting somewhere near the truth is important because according to the prospectus the bond will be "unconditionally and irrevocably guaranteed" by Abu Dhabi emirate, as quoted from Zawya Dow Jones in the Gulf News daily newspaper of July 20.

Assuming an oil price of $60 per barrel during this year, the budget deficit that reached $34.5 billion in 2009 will fall to $23 billion in 2010. The 2009 deficit figure was learned from a previous prospectus for the $10 billion sovereign bond in March last year. However, according to that prospectus, the deficit in 2009 would reach $11.6 billion. The actual deficit proved to be three times higher.

"As with previous deficits, the budgeted deficit in 2010 is expected to be financed by transfers from ADIA [Abu Dhabi Investment Authority] and ADIC [Abu Dhabi Investment Council] which in turn are expected to be funded by Adnoc dividends," the Waha prospectus stated. ADNOC is the Abu Dhabi National Oil Company that receives oil revenues.

ADIA and ADIC are sovereign wealth funds with huge reserves, so there is no danger of Abu Dhabi running out of money anytime soon, which is comforting for potential buyers of the Waha Capital bonds. However, given that the 2009 deficit was much higher than the numbers in the bond prospectus suggested, it is possible that the 2010 deficit would also be higher than the projected $23 billion. However, since oil prices seem to be hanging around $70 per barrel this year, that $23 billion could shrink.

In any case, the exercise of figuring out how much is owed and how much is available for investment goes on as long as the government of Abu Dhabi fails to provide figures on time. What is clear is that the debt situation has resulted in some slowdown of the huge projects that are outlined in Abu Dhabi Plan 2030.

For example, while the Saadiyat Island museums, Khalifa Port, and Abu Dhabi International Airport expansion seem to be moving ahead, other projects are going more slowly. One of those is Masdar City, the futuristic carbon-neutral development that was intended to include higher education and breakthroughs in energy saving as well as residential and commercial buildings. It has been under review for close to a year.

The Waha prospectus states that projects are now being looked at in terms of market demand. That includes some of the new transportation plans including the metro for Abu Dhabi which seems to have been postponed if not cancelled.

Even the Tourism Development and Investment Company (TDIC), the developer of Saadiyat Island, is now sounding more restrained. "As a prudent business, we will continue to carefully examine projects that have been under discussion but have not been announced as we continue to monitor the markets and move forward with those projects that are sound and will provide long term benefits to the UAE," said a spokeswoman for TDIC, quoted in The National daily newspaper.

In order to avoid being bogged down in debt from companies that have a government connection - as happened to Dubai last year - the Abu Dhabi government is setting up a debt management office within the Abu Dhabi Department of Finance due to open later this year. According to Saeed Al Mazroui, who will be head of the new office, it will monitor "all aspects of borrowing by the Abu Dhabi government."

The debt management office was introduced to the public in the Waha Capital prospectus. It will ensure that government owned companies like Mubadala Development and International Petroleum Investment Company keep their borrowing to "prudent levels."

The prospectus states, "The debt management office is expected to be responsible for managing the government's relationships with bond rating agencies and for ensuring that global investors have the necessary data to make informed decisions about investing in Abu Dhabi's government and public sector debt."

This week Standard & Poor reduced the long term rating of Aldar Properties from A minus to BB minus and called the outlook for the company that developed Yas Island "negative." Aldar is the leading developer in Abu Dhabi and owns the biggest land bank. The reduced rating suggests that it may not be as easy as some might think to turn Abu Dhabi's economy around.

We can hope that the debt management office releases debt figures quickly and accurately, making data mining in prospectuses unnecessary next year.

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