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UAE Poised for Modest Recovery in Second Half

DUBAI - The UAE is expected to stage a modest recovery in the second half of this year after a deceleration to 0.5 per cent growth in the first half on the back of positive structural factors including current account surpluses, diversification and infrastructure investment, an analysis by Standard Chartered Bank (SCB) said.

“Our view is that growth will decelerate to 0.5 per cent in 2009, with the first half being the worst. Positive structural factors should allow the UAE to stage a modest recovery in the second half, with the economy performing better in 2010. The silver lining in all of this is that we expect inflation in 2009 to average 2.5 per cent, down from an estimated 12.0 per cent in 2008,” Mary Nicola, analysts at SCB said.

The bank said the UAE economy was cooling off following years of impressive growth. “Budget and current account surpluses will allow the government to increase fiscal spending to combat the slowdown. The UAE has announced its largest budget in history for 2009 – Dh42.2 billion, a 21 per cent increase from 2008. The government expects a balanced budget this year, following surpluses exceeding 10 per cent of GDP from 2004-08.”

Fuelled by ample liquidity and a massive rally in the housing market, the UAE economy underwent a boom during 2007 and most of 2008.

“However, the cycle is turning, and these factors can no longer drive the economy,” the banks said in its outlook for the UAE.

“Tight liquidity is affecting investment, with several projects put on hold, and consumers are becoming cautious. A global recession, liquidity tightness, and falling oil prices will all take a toll on the UAE economy. The effects of the global downturn are already being felt in the UAE. Global sentiment and weaker demand have driven down oil prices, making a significant dent in the nation’s overall exports and revenues. Oil production in the UAE dropped after the most recent Opec meeting to 2.2 million bpd from 2.6 million bpd in September 2008,” it said.

The slide in oil prices will have a significant impact on government revenues if oil falls to below $45 and stays there.

Historically, trade has played a significant role in the UAE economy. Dubai has established itself as the third-largest re-export centre in the world, and re-exports comprised 44 per cent of its GDP in 2007. But with the world economy in recession, global trade is slowing, it noted.

A sharp contraction in construction, real estate and tourism sectors will aggravate the crisis, the bank said. The construction industry, the fourth-largest contributor to the UAE’s GDP and the third-largest contributor to Dubai’s GDP (accounting for 9.5 per cent and 12.74 per cent, respectively), slowed in 4Q-2008. The value of contracts awarded in the UAE fell by 40 per cent in the fourth 2008 quarter.

Many projects have been put on hold due to tight liquidity and a slowing market, and several contractors have been forced to lay off workers. The same applies to the real-estate sector. Large property developers have laid off staff in the past few months and projects have been put on hold.

As the UK accounts for the largest number of tourists to the UAE, we can expect the slowdown in the UK economy to reduce tourist arrivals, it said.

issacjohn@khaleejtimes.com