Breaking Views: Dubai confusion

(Reuters BreakingViews) - Dubai is guilty of encouraging a sovereign confusion. Until it fell on hard times, the emirate rarely distinguished between $26 billion of sovereign debt and the much riskier $50 billion or so owed by government-related entities, including Dubai World, whose repayment difficulties rocked global markets last week.

The sovereign finances of Dubai are no cause for alarm. Debt stands at a moderate 40 percent of GDP and the fiscal deficit in 2009 should only be 1.8 percent of GDP, according to an October prospectus for $6 billion in new bonds. That money was raised without difficulty.

The government also has a reasonably diverse stream of revenues. This year, 54 percent of the $9.1 billion intake is expected to come from visa, land and tourism fees, 19 percent from customs duties and 9 percent from dividends paid by the Investment Corporation of Dubai, the investment vehicle that holds the Emirates airline and stakes in local banks and utilities. Oil and gas-related revenues should provide 14 percent.

Even with a weaker economic backdrop, there doesn't seem to be any need for direct income taxes or an increase in the tiny corporate tax rate. The government won't need to renege on its pledge to keep the Dubai International Financial Center tax-free until 2054.

Entities related to the government but not supported by it — especially Dubai World, which is weighed down by borrowings against questionable real estate projects — are less fortunate. Dubai's finance minister is right to say investors should have drawn a clear line between the two.

But the government made that job harder by routinely including commercial revenues in public discussions of government finances. A year ago, officials said the emirate's total debt burden was $80 billion — a sum that included both sovereign obligations and those of government-linked investment vehicles like Dubai World.

Next time there's a gray area between government and private sector, maybe creditors will be more careful — and insist on officials being clearer, too.

(Reuters Breakingviews is the world's leading source of agenda-setting financial insight. Breakingviews has recently been acquired by Thomson Reuters and is now Reuters' brand for financial commentary.)