A systemic increase in debt to finance Dubai's development has resulted in growing liabilities to the government and the need for greater federal support, says a study.

Dubai's corporatist business model has played a central part in the emirate's economic transformation over the past decade, says Moody's Investors Service in a new Special Comment released today.

Moody's publication entitled 'Demystifying Dubai Inc. -- A Guide to Dubai's Corporatist Model and Moody's Assessment of its rising Leverage' offers a comprehensive examination of the various corporate layers that make up Dubai's government-controlled system, which Moody's defines according to the function of the corporations and their relative maturity.

The report also assesses the risk factors that determine credit ratings amongst Dubai's government-related issuers (GRI), as well as the role of Abu Dhabi and the federal government in Moody's criteria for identifying government support.

'In realising Dubai's growth programme, the city is run according to a corporatist model, whereby the government represented by Dubai's Ruler and a number of core Executives oversee the operations of large state-owned enterprises that dominate each economic sector', says Philipp Lotter, Dubai (DIFC) based Senior Vice President at Moody's Middle East Limited and co-author of the report. 'While this system has proved successful to date, cumulative liabilities are currently rising faster than investments are able to generate returns, which increases Dubai's medium term susceptibility to execution risks and necessitates a clear understanding of wider implicit federal support when rating key
government-backed corporations', Lotter adds.
 
Moody's report elaborates on Dubai's recent history and the acceleration of its economic transformation, supported by a model of state-run capitalism where the boundaries between government, the ruling family and private enterprise are fluid.

In most countries there are identifiable delineations between the public and private sectors', says Tristan Cooper, Dubai (DIFC) based Vice President at Moody's Middle East Limited and co-author of the report. 'In Dubai, however, the state corporatist model plus the fact that the Ruler and his closest relatives form the core of the government make it difficult to draw such distinctions', Cooper adds.

Moody's publication defines the various components of Dubai's corporatist model into seven distinct categories: In addition to the central government, which is dwarfed in both liabilities and revenues by the corporations it owns, Moody's categories include 'The Holdings', 'The National Champions', 'The Embryonic Entities', 'The Quasi-Government Authorities', 'The Service Providers' and 'The Financial Investors'.

Moody's also examines the rise in debt at various state-owned corporations, which are considered contingent liabilities of the government, given the close relationship between the central government and the large corporations that it owns, and the resulting uplift that GRI-ratings obtain from implied government support.

'Moody's has conservatively identified in excess of $47 billion in liabilities at various government-related companies, which represents more than 100 per cent of Dubai's 2006 gross domestic product', Philipp Lotter states. 'We believe that leverage raised primarily through state-owned corporations will continue to grow faster than GDP for at least the next 5 years, during which the Emirate's susceptibility towards execution, financing and geopolitical risks will be at its most pronounced', Lotter adds.

Given the rise in contingent liabilities, Moody's analysis of government-related issuers in Dubai places growing emphasis on the willingness and ability of the federal government and Abu Dhabi as the largest and wealthiest of the seven emirates to support Dubai-based GRI's, in addition to Dubai's own willingness and ability to support.

'We would expect a high level of support from the federal government and/or Abu Dhabi at least for other Emirate governments and, in all likelihood, the most important publicly owned financial institutions and corporations throughout the UAE's seven Emirates, although we consider each case carefully on its own merits', explains Cooper. -TradeArabia News Service