Dubai in better position to weather any economic fallout: Citi

Dubai’s financial system is in a better position to weather any fallout from economic and financial uncertainties and will remain the hub of choice in the region for the foreseeable future, according to Citi.

“Despite a decline in deposits in recent months, we think the banking sector is better capitalised and more liquid relative to 2008/2009, with more stable liabilities (dependence on external funding is much lower than in mid 2008),” the monthly report said.

“It is also dealing more aggressively with legacy loan impairments, as evidenced by the third quarter results of Emirates NBD announced late October. Asset markets, especially real estate, are already relatively depressed, reducing the likelihood of a sharp decline in the near term.”

However, Dubai is exposed in the near term to deteriorating global and financial conditions, the report said.

“The impact on the real economy will likely come mainly through the external channel, where a fall in services exports, mainly tourism, logistics and transportation, would have a deeply negative effect on economic activity, as happened during the global economic downturn in 2009.”

According to Citi, Dubai’s position as the primary regional hub will drive economic growth, a position, which has been strengthened by recent unrest in Mena economies.

Besides, it believes the impact on Dubai’s real economy from the substantial public sector debt overhang will be significant.

“The main channel through which such an overhang affects the economy is by restricting access to more capital and thus investment. Dubai’s need for further capital and investment in the medium term is relatively small, given what we view as an existing over-capacity in its infrastructure, most notably in residential and commercial real estate.

“Indeed, our economic forecasts incorporate a significant decline in investment in the medium term, while we think overall growth will remain robust,” the report said.

On the real estate side, it said there has been a slowdown in construction projects, priorities now shifting from high-end real estate and tourism assets towards housing for nationals in the emirate.

“The shift in priorities could have a significant impact on the real estate and construction sectors. Our forecast for 2011 growth incorporates a nominal decline of five in the construction sector, and flat growth in the real estate services sector,” Citi said.

In the past few weeks, Dubai has announced a Dh2 billion worth of tourism projects, a local real estate fund which could go up to $1 billion, and a Dh4 billion Al Sufouh Tram project.