Higher oil prices and strong positive momentum in Abu Dhabi and Dubai economies are being cited as reasons by Standard Chartered bank for revising its 2012 growth forecast for the country by a 100 basis points, from the earlier 2.4 per cent to 3.4 per cent now.
In a recent report titled “The ‘haves’ and ‘have nots’”, the bank has also upwardly revised the economic growth estimate of GCC peer Saudi Arabia. “We have revised our 2012 forecasts for the UAE to 3.4 per cent from 2.4 per cent and for Saudi Arabia to 4.7 per cent from 2.9 per cent. Both countries are able to export more oil at higher prices,” the bank said.
Stanchart’s lead economist Marios Maratheftis says in the report that the UAE economy is better off due to a stabilizing property market in Dubai and a strong showing in other key economic sectors like logistics, retail and hospitality, coupled with Abu Dhabi’s gains from a higher oil price.
“The two largest economies in the UAE, Abu Dhabi and Dubai, are both enjoying strong positive momentum,” says Maratheftis. “Dubai has faced significant challenges over the past three years, the result of the bursting of the housing-market bubble and years of over-leveraging. The housing market is now stabilising, with the bid-to-offer spread in housing market transactions narrowing to pre-crisis levels,” he said.
“While there has been much focus on property prices, it is the volume of transactions that can be more important. Prices do not offer any useful information if only a handful of transactions are taking place. In recent months, property prices have stabilised, at lower levels. But with asking and offered prices converging, the volume of transactions is increasing. Official data from Dubai shows that the number of transactions for apartments in 2011 was up by 30 per cent year-on-year. Given that none of this increase came through price increases, it must be the result of more transactions,” Maratheftis adeds.
However, he has warned that the recent increase in transactions and an uptick in prices cannot be extrapolated to mean that the prices will definitely go up significantly in the short-term.
“This is indeed a positive development, but it is still premature to conclude that a significant pick-up in prices is imminent,” he said in the report, adding that the housing market in Dubai remains oversupplied.
“The housing market is oversupplied, and it is worth noting that in 2011, another 13,000 units were completed and put on the market. There are 38,000 units scheduled to be completed in 2012. As far as the real economy is concerned, the stabilisation of prices and the pick-up in transactions is a good enough situation for now, as it can improve sentiment and increase economic activity,” he added.
At the same time, he said that the other key sectors are showing signs of improvement as well. “With the housing market stabilising, Dubai is finding strong support from the key pillars of its economy. Logistics, retail, and hospitality have all been performing very well, and signs in Q1 this year are positive. Dubai faces the challenge of significant debt maturities this year, but there is a perception that there is a plan in place and that surprises this year will likely be avoided,” the report added.
For the UAE’s capital, the Stanchart report maintains that higher oil prices and a pick-up in strategic non-oil economic activity will boost its prospects.
“Abu Dhabi benefits directly from higher oil prices. But in 2012, the main difference to the economy is likely to come from the non-oil sector. The government used 2010 and 2011 to re-assess several of its longer-term strategic projects. This resulted in anaemic non-oil economic activity. But there are signs that things are changing and Abu Dhabi is ready to kick-start many of the projects in the pipeline,” the report states.
“Higher oil prices and geopolitical events are widening the gap between the ‘haves’ and the ‘have nots’ in the Middle East and North Africa (MENA) region. Oil exporters are outperforming, with oil revenues being used to fund investment in infrastructure and social programmes,” the bank said in its report.
“In contrast, oil importers face challenges. Oil importers, such as countries in the Maghreb and the Levant, have high import bills, high unemployment and incredibly limited fiscal space to help boost their economies,” the report states. “Given their dependence on foreign inflows, these nations are also vulnerable to changes in global risk appetite and the global economic environment.”
The bank adds that it believes that the higher oil prices are here to stay, and maintains that the risk premium in oil prices, on account of instability in some countries of the region, is less than 10 per cent of the oil price.
“It is important to note that it is not only geopolitical tensions that are driving oil prices up; we estimate the risk premium in oil prices to be only around $10/barrel (bbl). High oil prices are having a direct impact on growth and a more important indirect impact by enabling investment in key infrastructure projects and social programmes,” it adds.
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