Double-digit GDP growth to be sustained

(CRAIG SCARR)   

A surge in investments and government spending in the past year is expected to keep UAE gross domestic product growth in double-digits, new research has revealed.

Driven by the surge in oil prices in the past few years and strong regional liquidity, the UAE economy has had high double-digit nominal growth rates since 2003, Kuwait-based investment bank Global Investment House said in its UAE economic and strategic outlook titled “Dynamism at play”.

In 2006, GDP at nominal prices increased to Dh599.2 billion, an increase of 23.4 per cent over Dh485.5bn recorded in 2005. Early estimates from the Ministry of Economy indicate that the nominal GDP increased by more than 16 per cent to reach Dh678.9bn in 2007. Former Economy Minister Sheikha Lubna Al Qasimi, who now holds the portfolio of Foreign Trade, yesterday forecast that the UAE gross domestic product will grow 60 per cent to hit a trillion dirhams by 2012.

“A lot of infrastructure development activities are going on in the Emirates, with Dubai being the centre of much activity. Almost all sectors are undergoing rapid development and expansion as the country seeks to lay a solid groundwork for future economic growth,” Global said in its report.

The UAE accounts for most of the ongoing and planned infrastructure projects among the GCC countries, amounting to an estimated $680bn (Dh2.5 trillion) in investments over the next few years, according to MEED Projects. Abu Dhabi alone is to spend more than $200bn over the next five years on infrastructure.

Non-oil keeps growing

The non-oil sector recorded a higher growth last year compared to the hydrocarbons sector. The share of crude petroleum and natural gas in GDP came down to 35 per cent against 37.3 per cent in 2006, Global said. Private and government consumption is expected to have increased by 18.4 and 22 per cent respectively in 2007 compared to a growth of 17.9 and 12.4 per cent respectively in 2006.

“This is mainly due to the increase in income levels, rising population and higher prices with their share in total GDP increasing to 46.7 and 10.6 per cent respectively in 2007 from 45.9 and 10.1 per cent in 2006. What is noteworthy is that the gross capital formation, which is mainly the capital spending by the government and the private sector, increased by an impressive 19.4 per cent, which in turn has come on the back of 29 per cent growth achieved in 2006 and stood at 20.7 per cent of GDP in 2007 as compared to 20.2 per cent in 2006.”

More inflation fears

The UAE’s currency continues to remain pegged to the US dollar. The UAE Central Bank aligns interest rates with those in the US, and by issuing certificates of deposit to commercial banks. With the dollar peg and complete capital mobility, nominal interest rates in the domestic market have tracked US rates closely. Accordingly, interest on three-month interbank deposits are on a declining trend. The high inflation and low interest rate environment has resulted in an increasingly negative real interest rate situation, Global said.

“This coupled with an expansionary fiscal stance has added to the upsurge in credit growth and increased development activity leading to high inflationary pressure. The broad money supply, as measured by M2, has exhibited consistent positive trend during the past few years.”

Banking gains

The UAE banking sector continues to grow as a result of the relatively low interest rate environment, high oil prices and a flourishing economy. Analysts consider the country overbanked, with a remarkably high number of lenders serving a population of around 4.5 million and an economy with an annual GDP of about $190bn.

As of September 2007, the UAE had 22 local banks, 27 foreign banks, two specialised banks and around 65 representative offices of other foreign banks. The total assets of banks operating in the country have grown by 43.4 per cent to reach Dh1,232.5bn at the end of 2007, against Dh859.6bn at the end of 2006, Global said, making it the largest among the GCC countries.

This has come on the back of a strong year-on-year growth of 34.7 per cent reported at the end of 2006. Banking assets have grown at a compound annual growth rate (CAGR) of 35.4 per cent in the past four years from 2003-2007.

Building infrastructure

The infrastructure projects being planned in the UAE, many of which are still on the drawing board, will ensure that construction activity continues to be brisk for some years. The Dolphin gas pipeline has gone on-stream, the first two lines of the new Dubai Metro rail system are nearing completion, work on the new Khalifa Port is under way, and a rapid expansion of airports in Dubai and Abu Dhabi is likely to be completed by the first quarter of next year.

The real estate and business services sector continues to grow, recording a CAGR of 20 per cent during 2003-2007. In 2007, real estate and associated business services constituted eight per cent of UAE’s GDP, or Dh55.8bn, a surge of 21 per cent.

“This sector was buoyed by the increasing investment in infrastructure, due to the country being positioned as an attractive tourist destination in addition to the increase in the residential and non-residential units. The real estate and construction sectors together accounted for 16 per cent of GDP in 2007, Global said.

Tourism expands

The tourism sector is enjoying good revenue growth and high occupancy rates of above 80 per cent in Abu Dhabi, Dubai and Sharjah in 2007. According to the Department of Tourism and Commerce Marketing, Dubai accounts for more than 75 per cent of tourists visiting the UAE and is set for strong growth with $354bn worth of hotels, aviation and other hospitality infrastructure projects under way.

“Dubai remain the UAE’s tourist hub although it will face increasing competition from Abu Dhabi, which plans to attract three million visitors by 2015, up from 1.45 million in 2007.”

Manufacturing

The manufacturing sector is second only to the hydrocarbons sector, contributing about 12.3 per cent to the nation’s GDP in 2006 and 13 per cent in 2007. Global estimates that the UAE manufacturing sector grew by 23.6 per cent last year to reach Dh90.8bn, compared to Dh73.4bn in the previous year. Growth in this segment has been steady since 2003, logging a CAGR of 21.1 per cent to 2007.

Investments in the non-oil industrial sector reached Dh72.6bn at the end of 2007 on the back of high economic confidence among both government and private institutions, the Ministry of Finance and Industry’s 2008 Statistical Industrial Book has reported.

The strong all-round macroeconomic growth and high liquidity in the region was reflected in the performances of the region’s capital market. All the seven bourses of the Gulf rebounded from their poor performance of 2006 and posted an average return of more than 25 per cent in 2007, Global said.

A substantial increase in new listings is likely this year; the National Bank of Abu Dhabi alone has announced it expects to manage at least eight IPOs in 2008, with three aiming to raise at least $1bn by the end of June.

Diversified

The UAE continues to remain one of the most dynamic and diversified economies in the GCC, Global said. With the Opec production target raised for 2008 and considering the renewed focus on using improved production capacities, oil is likely to play a crucial role in the next few years’ growth.

“However, non-oil GDP is likely to dominate overall growth in real and nominal terms with the private sector playing a bigger role helped by the relentless surge in oil prices that has boosted the oil earnings and helped to underpin public investment and private confidence,” it said.

The number

$680bn
The value of ongoing and planned infrastructure projects in the GCC countries. Abu Dhabi alone is to spend more than $200bn over the next five years on infrastructure