DUBAI, March 17 Standard & Poor's downgraded the credit ratings of seven Dubai companies on Tuesday, including Emaar Properties EMAR.DU, and said it was worried about the health of banks as the former boomtown faces a sharp slowdown.
Dubai's economy could shrink between 2 and 4 percent in real terms this year, S&P said, as a collapse in oil prices and the global financial crisis take their toll on real estate prices and equities.
S&P said it had downgraded Emaar to BBB+ from A- with a negative outlook, taking the developer almost below investment grade, while it also slashed ratings of other companies, including DP World DPW.DI, by one notch each.
Four Dubai-based banks covered by the ratings agency were also placed on ratings watch, with negative implications, partly because S&P was concerned about the banks' exposure to the emirate's real estate sector.
Residential real estate prices in Dubai could slump almost 38 percent this year, a Reuters poll showed this week.
"The global economic downturn continues to depress some of Dubai's key economic sectors, including trade, tourism, and commerce," S&P credit analyst Farouk Soussa said in one of three notes issued on Tuesday. "We expect that as a result of these factors, the economy may contract in 2009."
Dubai's economy would grow just under 2.5 percent this year as real estate, construction and exports come under pressure, the emirate's chief economist said in February.
But many economists have said economic growth in the UAE, a federation of seven emirates including Dubai and Abu Dhabi, would slow to nearly zero this year. Demand for real estate appeared to have "abated", Soussa said.
ECONOMY TO SHRINK
Emaar, one of the region's biggest developers, was downgraded due to its heavy exposure to the weakening Dubai property market, S&P said.
"The weak markets are negatively affecting our view of Emaar's business risk, and are likely to weaken Emaar's currently healthy financial position in the near to medium term," said S&P credit analyst Alf Stenqvist.
Some $335 billion of UAE construction projects have been put on hold, London-based MEED said this week.
S&P also highlighted the potential negative implications of the economic slowdown for Emirates Bank International and National Bank of Dubai, which have merged into Emirates NBD ENBD.DU, Mashreq MASB.DU and Dubai Islamic Bank DISB.DU.
"We expect Dubai's economy to contract between 2 percent and 4 percent in real terms in 2009, putting pressure on banks' asset quality and profitability," S&P said. "Dubai is a small open economy that can do little to shield its key sectors from the impact of a fall in external demand in the coming months."
S&P said it was concerned the Dubai government could use its banks to help refinance debts of state-linked firms due for refinancing this year, after they were "important participants" in the refinancing of Borse Dubai's $3.4 loan this year.
To help ailing state-linked companies in Dubai weather the financial crisis, the Dubai government last month sold $10 billion in bonds to the UAE central bank to set up a fund companies can tap to cover their financial commitments.
S&P lowered its A+ ratings on DIFC Investments, DP World DPW.DI, Jebel Ali Free Zone [JAFZS.UL] and JAFZ Sukuk to A.
The A/A-1 ratings on Dubai Multi Commodities Centre Authority were lowered to A-/A-2, while it cut its A+ long-term rating on Dubai Holding Commercial Operations Group [DUBAHC.UL], a unit of Dubai Holding, owned by the emirate's ruler, to A.
(Reporting by John Irish; Editing by Rupert Winchester)