The UAE is immune to upheavals sweeping the Middle East and North Africa while post-crisis recovery in most sectors makes Dubai a safe haven for business, according to a key Western financial institution.
Given its stable political and economic system, the UAE is expected to benefit from the current turmoil in the region in terms of investment and bank deposits, with foreign funds already finding their way into the country’s banking system, the Washington-based Institute for International Finance (IIF) said.
As a result, the economy of Dubai and the entire UAE will largely rebound in 2011, with overall growth rising to 3.8 per cent and nominal GDP gaining at least $50 billion. The country’s fiscal balance is also projected to sharply recover.
“The UAE has been spared the political turmoil in the Arab world. The economic and social factors that have contributed to the unrest in other parts of the region are not significant in the UAE…..the country’s small native population of less than one million (more than 85 per cent of the labor force are expatriates) is amply provided for. The high standard of living and relatively open and tolerant society are important factors reinforcing social stability,” IIF said in its 27-page report on the Arab world, sent to Emirates 24/7.
“Dubai, with the best infrastructure in the region, is viewed as a relatively safe haven for business. Trade, hospitality, and finance have begun to recover significantly in Dubai, offsetting further contraction in the real estate sector.”
The report showed Abu Dhabi’s five-year CDS spreads, which measures the cost of insuring against a sovereign default, stood at 94 bps as of April 29, the lowest in the region. Dubai’s CDS spread, while till high, has declined from 415 bps at end-2010 to 350 bps s of April 29, 2011.
It said the UAE economy, the largest in the Arab world after Saudi Arabia, registered a modest recovery in 2010 with real GDP growth of 2.7 per cent, following a contraction of around three per cent in 2009.
The recovery in 2010 was driven by an increase in oil production and high spending on infrastructure in Abu Dhabi, while in Dubai growth was driven by a pickup in trade, transportation, logistics industries, and tourism.
“The turmoil in the Arab world could indirectly boost the UAE’s economy through the following channels: (i) higher production of crude oil in Abu Dhabi; (ii) a spike in oil prices and hence revenues (oil prices are assumed to rise from an average of $80 per barrel in 2010 to $115 per barrel in 2011); and (iii) a diversion to the UAE of some of the regional trade, transportation, tourism, and possibly finance,” said IIF, which groups key banks in the US and other western nations.
“Consequently, growth is projected to accelerate from 2.7 per cent in 2010 to 3.8 per cent in 2011 and to four per cent in 2012…. hydrocarbon real GDP is expected to grow at about 4.5 per cent, driven by the increase in production of crude oil. Non-hydrocarbon real GDP will accelerate from an estimate of 2.6 per cent in 2010 to 3.6 per cent in 2011.”
In Abu Dhabi, non-hydrocarbon growth will be supported by high public spending on infrastructure, including through government-related entities (GREs).
Inflation is expected to remain subdued, rising from 0.6 per cent in 2010 to 1.9 per cent in 2011, the lowest among the GCC countries.
The further small decline in rents in the UAE as a whole will help to offset the significant rise in the price of food and other items in the CPI basket, IIF said.
“The current upheaval in the region may also have benefited the banking system in the UAE because of some diversion of capital from troubled countries. Total deposits (including resident, nonresident, and government) have risen significantly in recent months, up by 14.3 per cent in the year to March 2011.”
According to the report, more than half of the increase was in time and savings deposits in local and foreign currencies.
“In our view, this increase in longer-term deposits reflects improved confidence in the UAE economy following Dubai World’s successful debt restructuring and the subsequent bond issues by the government of Dubai and a number of GREs.”
The report expected credit growth to improve gradually in 2011 and 2012, supported by strong growth in deposits, lower interest rates in real terms, improvement in the liquidity of banks, and a pickup in domestic demand.
“We therefore expect the 12-month credit growth to accelerate from 2.5 per cent in March to six per cent by end-2011 and eight per cent at end-2012.”
The report said UAE banks, which control the largest asset base in the Arab world, remain well capitalized and profitable.
It showed the combined provisions of banks more than doubled, rising from the equivalent of $6.8 billion at end-2008 to $16.2 billion at end-March 2011.
The nonperforming loans (NPLs) to total loans for all UAE banks rose from 4.3 per cent at end-2009 to nearly six per cent at end-2010, partly due to a change in the classification of NPLs from six months to three months.
“Provisions now cover about 95 per cent of NPLs. The liquidity of the banking system has also improved, as indicated by the steady decline in the loan-to-deposit ratio, from 108 per cent at end-2008 to five per cent at end-March 2011.”
Turning to the fiscal sector, the report showed the UAE’s current account was in a surplus of $22 billion in 2010 (8.6% of GDP) due to an increase in oil exports resulting from higher oil prices and a modest increase in production.
With oil prices at $115 a barrel in 2011, that surplus is set to widen to $43 billion, or 14.1 per cent of GDP, it said.
“In the absence of detailed official data, our estimates of the consolidated fiscal data (including Abu Dhabi Investment Authority’s (ADIA) investment income and Abu Dhabi National Oil Company’s profit transfers) show a small deficit of less than one per cent of GDP in 2010, as compared to a large deficit of 10.5 per cent of GDP in 2009,” the report said.
It said the improvement in fiscal performance is explained by a sharp increase in Abu Dhabi’s government revenue from oil, and, on the expenditure side, a decrease in lending and equity outlays as compared with 2009 when the Abu Dhabi government provided substantial equity and loans to GREs.
“For 2011, we forecast a consolidated fiscal surplus of 7.6 per cent of GDP, despite the projected small deficits of the federal government and Dubai’s budgets for 2011...this surplus is explained by the large increase in the government of Abu Dhabi’s revenue from oil, which is expected to more than offset our projected increase of eight per cent of consolidated spending.”
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