This is the season for New Year forecasts, and while the outlook for global markets is pretty bleak, the UAE remains a booming economy with excellent prospects for the year ahead. Older heads might begin to ponder how long this can last if the oil-consuming countries are in serious economic trouble, but it is hard to get very gloomy about the next 12 months in the UAE.
Pressure will ease on the US dollar and, therefore, lessen the calls for a revaluation or de-pegging from the dirham. However, the UAE authorities may still conclude – probably alongside Qatar – that a revaluation is appropriate to restore the competitive position of the economy, and dampen imported inflation.
High oil revenues will fuel UAE economic growth to new heights in 2008. However, with mounting economic problems in key consumers such as the US and the UK, this could prove to be the top of the New Millennium Boom, with a less certain outlook for 2009, albeit a soft landing and not a crash.
Volatile year for crude prices
Oil prices will have another volatile year. The ongoing crisis in global financial markets will hit commodity prices too. But geopolitics is likely to spur prices higher again, perhaps to another record during the year. Tensions with Iran may continue to ease in 2008. But the Turkish incursion into northern Iraq, the anti-US politics of Venezuela and Nigerian insurgents remain hazards to oil-price forecasting, and may send prices spiralling higher.
Location to have a say in realty prices
House prices in the UAE will rise by 10 to 20 per cent but location will become increasingly an important factor in price increases. The days of across-the-board rises in prices is almost over because with supply increasing buyers will become more selective. But buy the best locations for apartments and you will not go far wrong. Villas will remain in relatively short supply by comparison to apartments and continue to show better capital gains.
Gold as investment
UAE investors will increasingly turn to gold, silver and precious metals and away from investments in western and emerging stock markets and foreign real estate. This is the classic flight to a safe haven at a time of great uncertainty for investors, and it will be more and more difficult as the year goes on for UAE-based investors to know where to safely stash their cash overseas. Many of the old favourites, like UK property and US stocks, look set for a singularly bad year ahead. But a word of warning – gold may first drop sharply on a big sell-off by global investors during an equity crash.
Share prices will be volatile but still offer traders good gains in 2008. The market is likely to head lower on any weakness in major Western markets, and they are certain to take a serious dip, and possibly crash in 2008. Yet this will be a great buying time as the stock market will rebound, if oil prices get a hike from geopolitics.
A final thought for 2008: the world outside the UAE will become a bleaker place as the economic downturn encircles the world. Expats who have been thinking about leaving to go home will have cause to think again, and nationals will reflect on the benefits of investing at home. This retention of staff and money is good for the local economy.
Mega project launches slowed in 2007 and it is probably a reasonable prediction to expect very few more to emerge in 2008. There is now a backlog of mega projects and capacity constraints mean new ones will have to wait – simply because the men and materials cannot be mobilised. Observers will still still be amazed by what they see coming out of the ground in the UAE, and given the time lag in building major projects this will continue for many years.
Inflation to rise
Inflation will rise to a new high in 2008. Rental and salary rises are the local factors boosting inflation in the UAE, driven of course by record oil revenues. Meanwhile, the dirham pegged to the US dollar guarantees that inflation will be imported from European-sourced goods and services, unless the dollar rallies.
Local investors may not only choose UAE property and equities for 2008, there is also a good argument for holding dirham cash deposits too. The revaluation, if it happens, will provide an instant bonus in US dollar terms – in addition to interest paid. That may not seem enough to compensate for higher local inflation but having instant cash available to pick up investment bargains at some stage could be sufficient compensation. Meanwhile, cash allows you to sleep soundly.