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UAE Economy to Shrink this Year, Rebound in 2010: EFG-Hermes

DUBAI - The UAE economy is expected to contract marginally by 0.04 per cent in 2009, but the overall outlook will be supported by strong government spending and the continuation of investment programmes, a leading investment bank said in its latest forecast.

“UAE’s non-oil sector is far more externally exposed and there is currently a correction in the property market. We are forecasting a sharper deceleration in private consumption growth than in other GCC countries,” EFG-Hermes said.

The bank said a number of key economic drivers in the UAE would be impacted by the global slowdown, including the tourism and financial sector. “Tourist arrivals are also a key driver of retail spending. This will be amplified by a series of job cuts linked to a property market correction, the cancellation of a number of property related projects and in the financial sector,” it said.

According to the bank, the UAE real GDP which rose 5.2 per cent in 2007, and 6.6 per cent in 2008, would see for the first time a slight contraction in 2009, and a turnaround in 2010 with a growth of 4.2 per cent. The UAE’s nominal GDP projected for 2009 is $214.1 billion, down from $251.2 billion estimated for 2008. In 2007, it was $198.9 billion.

The bank said while Abu Dhabi’s investment would remain largely on track and would be broad-based, although there would be some scaling down of projects, Dubai would continue to focus on infrastructure investment.

On the overall regional outlook, the bank said there would be a marked deterioration in the GCC economic figures in 2009 with the sharp contraction in the oil earning. Despite this, the bank maintained that the GCC region was in a strong position to face the current challenge given the marked buildup of foreign reserves.

Projecting an average Brent crude oil price of $50 per barrel for 2009 and $65 per barrel for 2010, EFG-Hermes noted that there would be a marked drop in GCC production levels in 2009. “Naturally, the countries with the greatest contribution of the oil sector should see the greatest deterioration. Kuwait and Saudi Arabia will see real GDP contract owing to the production cuts and the larger share of their oil sector to GDP. Real GDP growth will remain in positive territory in Qatar, Bahrain and Oman.

All GCC countries will see their nominal GDPs shrink with the sharp fall in the oil price, along with the production cuts. Meanwhile, Bahrain, Oman and Saudi Arabia will see their budgets fall into deficits, while all the regional countries except Kuwait and Qatar will realise current account deficits.”

The bank said the countries with the greatest buildup in reserves over the last few years and the environments in place to ensure the continuation of their economic investment programmes have the strongest macroeconomic outlooks.

“Private consumption growth will also decelerate with the wealth destruction related to the fall in global and regional stock markets, along with other investment products.”

EFG-Hermes remained most positive on Qatar, Saudi Arabia and Abu Dhabi. “It is important to note that Qatar will have the strongest economic figures in the region and one of the strongest globally as a result of a substantial jump in gas production. In 2008, the gas sector overtook oil as the largest contributor to Qatar’s GDP growth.”

“While the UAE and Kuwait have a substantial ability to increase spending, with the largest build up in foreign reserves (even taking account of a marked fall in global asset values) and the lowest budget-breakeven oil prices, certain aspects of their economic environments affect their outlook.

“While in the case of Kuwait, the difficult political environment is limiting progress with the investment and wider reform programmes in the UAE, the non-oil sector is far more externally exposed and there is currently a correction in the property market.”

· issacjohn@khaleejtimes.com