Dubai’s economy is projected to sharply rebound by nearly 3.5 per cent in 2011 as part of overall recovery in the UAE and other Gulf hydrocarbon producers, according to a key Western financial institution.
The Washington-based Institute of International Finance (IIF) made the forecasts in its first Arab world report, The Arab World in Transition: Assessing the Economic Impact, which was released in Dubai this week.
“Unprecedented divergence unfolds in 2011 in Arab economies, posing exceptional challenges but also opportunities. For the oil importers, the economic toll from the political upheaval will translate into a collapse in growth in 2011,” said Garbis Iradian, IIF Deputy Director, Middle East and Africa Department.
“In contrast, growth in the GCC will accelerate in 2011 while the combined current account surplus is set to surge from $129 billion to $292 billion, raising the level of their gross foreign assets to $1.7 trillion by year end.”
In the UAE, the second largest Arab economy after Saudi Arabia, growth is expected to accelerate from 2.7 per cent in 2010 to 3.8 per cent in 2011 and to four per cent in 2012, according to IIF.
It said 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) larger revenues due to a spike in oil prices; and (iii) a diversion to the UAE of some of the regional trade, transportation, tourism, and finance.
Dubai’s economy is expected to recover significantly, growing by 3.5 per cent in 2011 as compared to 1.7 per cent in 2010, the report showed.
Iradian said he expected credit in growth in the UAE to improve gradually in 2011 and 2012, supported by strong growth in deposits, improvement in liquidity of banks, and a pickup in domestic demand.
He said the UAE banks, which control the largest asset base in the region, remain well capitalized and profitable, adding that provisions now cover more than 95 per cent of non performing loans.
The liquidity of the banking system has also improved as indicated by the steady decline in the loan-to-deposit ratio, from around 108 per cent at the end of 2008 to 95 per cent at the end of March 2011, he said.
“Dubai has regained market access, but the cost of borrowing remains high, reflecting the rollover needs of the total of $31 billion falling due in 2011-2012, and concerns about the solvency of restructured GREs,” he said./
“Progress in structural reforms over the next few years, the strengthening of federal institutions, and the enhancement of transparency and governance in the corporate sector could accelerate the pace of economic growth to over four per cent in the medium term.”
Saudi Arabia’s economy is expected to return to strong growth of 5.3 per cent in 2011, underpinned by a significant increase in oil production and a substantial increase government spending (around 30 per cent), IIF figures showed. Non-hydrocarbon real GDP growth is projected at 5.1 per cent for this year, driven mainly by private consumption and government investment.
The IIF said its projections are based on estimated average prices of $115 and $110 per barrel respectively for 2011 and 2012, up from $80 per barrel in 2010.
“The strongest performer in the region is again Qatar, where overall real GDP is projected to grow by 18 per cent in 2011, driven by further large expansion in natural gas production and public investment expenditures.”
In Kuwait, growth is projected to accelerate from two per cent in 2010 to 4.4 per cent in 2011—spurred by government spending in the context of the government’s $107 billion investment plan (2010-2014).
Bahrain’s economic recovery has been interrupted and growth could slow to 2.9 per cent in 2011 from 4.5 per cent in 2010, with considerable downside risk if the situation goes unresolved for an extended period, the IIF said.
Turning to non-Gulf countries, the report said the economies of both Egypt and Tunisia face real GDP declines this year and, while growth is likely to rebound in 2012, they now confront exceptional pressures to develop economic policies that can both meet heightened expectations and garner international support. “Meanwhile, partly as a result of the upheavals and their impact on global oil prices, most of the leading Arab oil exporters (with the particular exceptions of Libya and Yemen) are set for significant growth and major rises in oil revenues.”
The report said that for oil importers as a group, the economic toll from the political upheaval will translate into a collapse in growth in 2011 and a rebound to a forecast 4.4 per cent real growth in 2012 crucially depends on the regional unrest coming to an end in the next few months.
Output this year in Egypt, Tunisia, and Syria is expected to contract between one and three per cent, while growth in Lebanon and Jordan will decelerate to four and 2.8 per cent, respectively, IIF said.
Growth in Morocco is projected at 3.3 per cent, driven in part by a rebound in agricultural output, the figures showed.
“The oil-importers face considerable downside risks to growth. Not only is the political reform process unlikely to be smooth and could drag on beyond 2011, further delaying investment decisions and slowing any economic recovery, but investigations into corruption are adding to business uncertainties,” it said.
“By contrast, growth in the Gulf Cooperation Council (GCC) will accelerate from an estimated 5.1 per cent in 2010 to 6.5 per cent in 2011, driven by expansion in crude oil production and larger increases in public spending.”
The report showed government spending in the GCC as a whole is projected to increase by nearly 25 per cent this year. “This would raise further the breakeven price of oil that balances their budgets.”