Dubai CDS spike: are we in recovery mode yet?

The FT noted this week that according to many analysts Dubai's “core model, built on finance and trade and infrastructure, still puts it far ahead of its rivals as competition heats up to be the region's hub.”  However, the city-state and its government-related companies still have a total of $110.6bn of outstanding public debt according to Bank of America-Merrill Lynch figures, of which a significant portion ($48.5bn) comes due in the next two years.  Last month Dubai World, the government-owned conglomerate, confirmed that creditors had indeed agreed to restructuring proposals regarding the $20bn of debt whose repayments the group announced a moratorium on last November, a move that analysts theorized could spur similar deveopments at other state-linked firms.  Simon Williams, chief economist for the MENA region at HSBC Bank in Dubai, thinks that the emirate has a whole has “shifted into recovery mode,” citing the fact that his firm's UAE Purchasing Managers' Index (PMI), which measures the performance of the OPEC member's manufacturing and services sectors, rose to 53.8 points in October–a 15 month high.  And last month the IMF upgraded its GDP forecast for the UAE to 2.4 percent, faster than the 1.3 percent it previously forecast, based largely on robust demand for UAE services, “particularly in light of Asia's rebound and the agreement on debt restructuring, which will resolve uncertainties and contribute to boosting real estate-related sectors.”  Yet worrisome news over this past weekend should give bulls some pause, as five-year credit default swaps (CDS) for Dubai spiked 30 basis points from the previous close to 440 basis points (a two-month high) on news that Dubai Group, a financial services firm, missed two payments on separate loans in recent weeks, including one arranged by Citibank.