UAE non-oil economy to rebound in 2011-2012

The UAE’s non-hydrocarbon economy is projected to edge up slightly in 2010 before it sharply rebounds in the following two years on the back of higher oil production and prices, according to a Saudi investment company.

After recording one of its highest growth rates during 2007-2009, the country’s non-oil GDP sharply slowed down to around one per cent in 2009 and growth is expected to further slacken to around 0.1 per cent this year, said NCB Capital, an affiliate of the Saudi National Commercial Bank.

In 2011, the non-oil sector is projected to recover by nearly 3.7 per cent and accelerate by about 4.1 per cent in 2012, NCBC said in a study.

It showed growth would be accompanied by higher oil prices and production by the UAE as it forecast the hydrocarbon sector, which contracted by nearly 6.3 per cent in 2009, to recover by 2.1 per cent this year and pick up by 2.2 per cent in 2011 and around 4.2 per cent in 2012.

The expansion in both sectors will boost real GDP growth from an expected 0.9 per cent this year to 3.1 per cent in 2011 and 4.1 per cent in 2012.

The UAE’s GDP, the second largest in the Arab world after Saudi Arabia’s, sharply slowed down in 2009 mainly because of downturn in the real estate and banking sectors, as well as a cut of more than 200,000 barrels per day in the country’s oil output in line with a collective OPEC quota agreement.

The downturn followed record high growth rates in the previous two years, when the real GDP leaped by 6.1 per cent in 2007 and 7.4 per cent in 2008.

Analysts said the UAE’s economic slowdown last year because of the 2008 global fiscal distress was partly cushioned by a surge in public spending as part of post-crisis stimulus measures, which also included support for banks.

Lower oil prices and output in 2009 also turned a persistent current account surplus in the UAE into a deficit of around 2.7 per cent of GDP, according to NCBC, which also reported a plunge in the fiscal surplus to only about 0.4 per cent last year from 12.4 per cent in 2008 and a record 26.7 per cent in 2007.

But the report forecast the current account balance would revert into a surplus of around 5.9 per cent this year and 13.1 per cent in 2011.

It projected the surplus to record an all time high of 20.3 per cent in 2012.

In current prices, the report expected the UAE nominal GDP to rebound by eight per cent this year after contracting by 11.9 per cent in 2009.

An expected rise in crude prices will further expand the nominal GDP by around 11 and 12 per cent in 2011 and 2012, the report showed.

Turning to inflation, it estimated the rate to remain as low as 1.6 per cent in 2010 before rising to 4.2 per cent in 2011 and 4.7 per cent in 2012. But it will remain far below the record high inflation rate of 12.3 per cent in 2008.

In a recent report, the UAE Ministry of Economy said real GDP expansion hinges on the oil price level and other factors but expected subdued growth. It noted that official estimates put growth at between 1.5 and 3.2 per cent in 2010-2011.

“Growth prospects of the UAE are somewhat subdued due to weaknesses in the global economic recovery and the slowdown in the real estate sector which has traditionally taken much longer to recover than other sectors,” the report said.

“Some observers have argued that the delays associated with the Dubai World debt restructuring process will have a negative impact on growth since foreign banks and investors are reluctant to invest under this uncertainly…..but as stated on more than one occasion, the Federal Government stands ready to support individual emirates although the growing role of the government in the day-to-day operations of a market type economy is not to be encouraged as demonstrated by the ‘exit strategies’ of many governments in high-income countries.”

For this reason, the report noted, GDP growth prospects of the UAE will be more favorable than high-income countries in advanced economies but will lag behind other emerging economies, especially in Asia, in the short to medium terms.

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