Easing in liquidity conditions, lower interbank lending and fiscal stimulus packages certainly bode well for a robust UAE economic recovery in 2010, according to a Dubai Chamber report.

The report takes a look at the year 2009, which was quite challenging for the business community and focuses on the promising prospects of the coming year 2010.

The economy is expected to bounce back in 2010, primarily due to a strong expansion of government spending, a pick-up in crude oil prices, the return of risk appetite and with it private consumption growth, says the report.

Hamad Buamim, Director-General of Dubai Chamber of Commerce and Industry, maintained that the UAE is one of the first countries in the world to recover from the effects of the global financial crisis.

"The UAE Government has played a crucial role in getting the country's economy back on track by offering various timely sops and liquidity to the affected economic sectors. The joint efforts by the federal and local governments in meeting the obligations of various government entities have boosted investor confidence as has the continuation of the government fiscal stimulus packages, and lower interbank lending make the outlook for the coming year more promising as we can look forward to a prosperous trading year," he said in the report.

Buamim further stressed that riding on the back of the economic recovery, the consumer confidence is now at an all-time high as the UAE banking sector is showing signs of recovery while the falling realty prices and rental costs has come to the relief of many Dubai residents and businesses alike. Dubai's exports have shown resilience in the wake of the economic downturn and will continue to register an upward trend in the coming year.

Following a record low in March, consumer confidence levels have risen signalling that UAE consumers are starting to embrace the idea of an economic recovery.

Quoting figures from a Nielsen Global Consumer Survey, the report states that a total of 87 per cent of consumers questioned in the survey believed they are in an economic recession (with concerns now turning to the economy rather than jobs as the biggest issue) but more importantly 45 per cent of UAE consumers are confident the country will emerge from the downturn in the next year, a 13 per cent hike from the last survey in March.

"This marked improvement in UAE market sentiment continues to indicate that the country is well on track to make a significant bounce back in growth levels from the declines experienced in the first half of 2009, particularly in the real estate and banking sectors. Looking ahead, this is one of the strongest indicators of a consensus among consumers that the worst is over, and that finally, there is light at the end of the tunnel, and that UAE consumers are clearly of the view that they are driving in the recovery lane now," the authors of the report said.

The UAE banking sector is also showing signs of recovery, which is adding to the level of optimism being witnessed off late.

Taking figures from the Central Bank, Dubai Chamber report mentions that after a difficult period of caution peaking in the fourth quarter of 2008, there have been a number of recent developments, which suggest that the UAE banking sector is regaining a certain degree of confidence.

"With strong government support, liquidity conditions are improving, interbank rates have receded and deposits are beginning to recover which, combined with lower lending rates, have brought the previously elevated aggregate loans-to-deposit ratio down to a narrow 103.8 per cent (Dh37.6 billion) in October 2009 compared to 109.9 per cent (Dh90.0bn) back in January of this year. Thus, this is clear evidence that the prescribed level of the UAE Central Bank loan to deposit ratio of 100 per cent is becoming a reachable target."

Also the one-month Emirates interbank offered rate (Eibor) peaked at more than 4.6 per cent back in October 2008 though has fallen considerably since then and the latest figures from the Central Bank suggest that interbank lending rates have fallen to 1.5 per cent in October 2009, it said.

"This significant easing reflects the improvement in market sentiment over the past few months and strong appetite of banks to start lending to each other and some observers have suggested that this trend is likely to continue throughout the remainder of this year," the report said.

The financial markets, another barometer of growth, have also shown improvement.

"Conditions in the financial markets have also improved since the beginning of 2009 despite the recent sharp declines witnessed towards the end of November. The Dubai Financial Market (DFM) index has witnessed a 5.8 per cent rise since January 2009 to date, and the Abu Dhabi Securities Exchange (ADX) has rose by 5.1 per cent over the same period. This suggests that the difficulties that were faced in the market are now clearly over with the stage now set for a strong recovery going forward. It is indicated that the easing of liquidity conditions, cheap asset prices as well as improved market sentiment is expected to drive the UAE stock markets in 2010."

"Overall, the banking sector's finances are starting to look healthier. UAE banks appear optimistic and generally upbeat about the sector's ability to bounce back from the current downturn. A recent survey of banking leaders in Dubai and Abu Dhabi revealed that over half of those questioned believed that interbank lending rates will continue to fall in the coming months with more than 75 per cent suggesting that banks on a whole will make a profit in 2009. This can only be taken as positive news from the business community as an easing in the availability and as well as the loosening of credit will enhance the drive for further expansion in the UAE. On the whole, the banking sector is emerging in better shape in the months ahead with the outlook remaining upbeat."

Dubai's exports, a strong pillar of growth for the emirate, has clearly shown resilience to the economic crisis with the value and indeed the volume of certificates of origin issued by Dubai Chamber not showing any signs of a strong downturn. "Dubai's combination of cost, market and environmental advantages that has over the years created an ideal and attractive investment climate for local and foreign businesses alike has meant that the export sector has been able to withstand the downturn since the onset on the economic slowdown in the fourth quarter of 2008.

"Thus, this confirms that the impact of the global economic slowdown has not been felt on the export sector of Dubai, and with the expected easing in liquidity conditions and the expected boost in investor confidence levels, both exports and re-exports are likely to rise further in 2010."

The crises may have resulted in a decline in real estate prices but this has been good for the economy. As a result of falling prices, the city has become more competitive, which may attract more businesses to come here.

"The fall in Dubai's property prices and rental costs since the last quarter of 2008 has come to the relief of residents and businesses alike. Some commentators have suggested that a combination of the departure of expatriate workers (leading to lower consumer demand) as well as the entrance of new housing stock into the market has pushed rental prices down by around 25-30 per cent since the beginning of 2009," the report said.

After having seen a continuous fall in real estate prices, it has now stabilised and has edged upwards in the third quarter of 2009, which signals that the realty market is beginning to show signs of a revival. This has been primarily triggered by the combination of an easing in liquidity conditions and a rise in consumer demand, it adds further.

Despite most sectors and barometers of growth showing positive signs, the UAE Government support will remain strong in 2010, which will further cushion the economy.

"The UAE Government has taken a swift and orderly approach to dealing with the economic slowdown and to mitigate its impact on the economy. As well as interventions to support the banking system, the federal and local governments have implemented robust counter-cyclical fiscal stimulus policies.

The aggressive cuts in the benchmark lending rate by the UAE Central Bank throughout 2008 have helped push down the interbank rate (which is already coming down due to the injection of liquidity by the UAE Central Bank into the system)," the report said.

Stronger crude prices will boost the UAE's current account position in 2010. "Crude oil prices have risen strongly in the last two-three months and is currently hovering $80p/b compared to a low of $32p/b in March this year. With the expected rise in aggregate demand in the months ahead this will mean that the current account is expected to bounce back in 2010 and register a surplus as this demand for crude oil drives prices upwards. From this, despite the higher government spending, with crude oil prices now expected to average $60.6p/b in 2009, according to crude oil futures market, the consolidated fiscal accounts for the UAE are projected to remain broadly in balance after years of large surpluses," the report said.


Inflation may rise

Since the beginning of 2009, monthly inflation rates in the UAE have witnessed a steep drop driven primarily by housing costs on the back of reduced demand for realty and a moderation in food-price inflation. Annual consumer price inflation average 1.9 per cent for the first 10 months of this year, which compares to a significant high of 12.3 per cent in 2008.

That said, since the summer of 2009, UAE inflation levels have in fact witnessed a pick-up with housing costs rising and contributing positively to inflation for the fourth consecutive month in October 2009. The UAE consumer price index stood at 113.86 in the first ten months of this year compared with 111.74 in the same period of 2008, says Dubai Chamber report based on data from the Ministry of Economy.

Housing and utility prices, accounting for the largest share of the CPI weight, at 39.3 per cent, have been the main factor behind the monthly rises since the summer and given the resurgence in demand expected in the months ahead this trend is likely to continue in 2010.

Cheap rental and property prices coupled with an easing in lending conditions on top of an overall marked improvement in individuals' appetite to invest has meant that property rents and house prices actually rose for the fourth month in a row in October.

Now that we have witnessed a rise in housing costs this could in fact mean that property rents and prices bottomed out in June (the lowest monthly index level for housing costs). This clearly signals the real estate and construction sectors are on the road to recovery.

With the slump in property prices and rentals, particularly in Dubai, coupled with the collapse in commodity prices (both oil and food), as well as slower money supply growth due to reduced oil liquidity, UAE inflation, said IMF, is likely to register a headline inflation rate of 2.5 per cent this year.

Though once the global economy starts to pick up then the UAE could face the new prospect of rising inflation as a recovery in domestic demand on the back of an increase in lending conditions, overall improved sentiment and higher import bills will all help to push the country back into price growth.

The critical concern for the UAE Central Bank will then be to how to respond if inflationary pressures resurface as it relies heavily on US monetary policy given the dirham's peg to the US dollar.

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