Surpassing the UAE Minister of Economy Sultan Mansouri’s recent forecast of a 2.5 per cent growth in 2010 GDP, Standard Chartered Bank, one of the leading global banks, has predicted “positive growth of three per cent this year, despite uncertainties and risks such as weak credit growth” for the country".
In its latest Global Focus for the month of September, the bank says that inflation in the UAE remains low “and this is unlikely to change”. The bank, in fact, expects “official numbers may overestimate inflationary pressures".
According to Standard Chartered, “inflation in the UAE has remained subdued, at 0.9 per cent year-on-year and 0.3 per cent month-on-month in July, as higher fuel prices resulting from local petrol price hikes caused the transport component (9.9 per cent weighting in the CPI basket) to rise by 3.5 per cent month-on-month. Housing costs continue to fall, with the housing and energy component (39 per cent of the basket) dropping by 0.2 per cent month-on-month in July".
However, the report claims that the housing component of the CPI may be skewed. “We believe that the housing component of the CPI does not accurately reflect deflationary dynamics in the UAE housing market - last year, this component rose by 0.42 per cent, lifting the overall index by 1.56 per cent, which surprised us given the sharp property-market correction during the year. We believe this component of the CPI basket is likely to face further disinflationary pressures, keeping UAE inflation subdued in 2010.”
Growth in the UAE is finding support from both the oil and non-oil sectors, the banks points out. “The oil sector makes up close to 30 per cent of the UAE economy. Higher oil prices and stable production should allow the oil sector to make a positive contribution to growth in 2010,” it says.
“There is also positive news from the non-oil sectors of the economy. The trade sector is significant for Dubai, with the ‘trade and wholesale’ component making up close to 40 per cent of Dubai’s GDP.
Official figures show that Dubai’s non-oil trade increased by 18 per cent year-on-year in H1-2010 to $76 billion (Dh279bn). Dubai’s aviation sector is also showing strength, with the number of passengers travelling through Dubai International Airport hitting 4.3 million in July this year, up 14.3 per cent from a year earlier.
The only concern that the bank raises is about the UAE’s credit growth, which it says is non-existent.
“The UAE credit growth is very weak, with private sector credit falling 3.2 per cent year-on-year and rising 0.6 per cent month-on-month in June. A key reason for this is that bank loans still exceed deposits. The gap narrowed from Dh40.2bn in June to Dh26.6bn in July, but this was solely the result of increased deposits and flat credit growth on a month-on-month basis.
“The lack of credit growth is draining liquidity from the system. It is also interesting to note that interbank rates in the UAE remain significantly higher than US Libor, despite the fact that the UAE dirham is pegged to the USD; 3M Eibor is currently at 2.337 per cent.
“The loan-deposit gap is one factor keeping Eibor higher, but it is not the only reason. While the gap has been narrowing since April 2010, the spread between 3M Eibor and 3M Libor rates has widened during the period. This could be partly because of a risk premium in the UAE, but also because of inefficiencies in the fixing process for interbank rates in the UAE.”