Lower prices and an expatriate exodus will likely depress inflation in the UAE to below half the six per cent historic average while the domestic economy will still record growth this year, a key Kuwaiti financial centre said yesterday.
Markaz Centre confirmed projections by the International Monetary Fund (IMF) that the inflation rate in the UAE would plummet in 2009 after climbing to its highest ever level of more than 14 per cent in 2008.
The IMF forecast inflation at only two per cent this year while Markaz put it at slightly higher at around 2.5 per cent.
"Inflation growth rates seem to have peaked out in 2008 at 14.8 per cent. The analyst (Markaz study) expectations for this year are at a 2.5 per cent, which is far lower than historic average inflation rate of six per cent," it said.
"The decline in commodity prices, rental caps, and a decline in expatriate population are expected to impact the inflation rates positively," it said.
Over the past few years, inflation in the UAE and other Gulf oil producers swelled to record high levels because of a surge in global commodity prices, strong domestic demand due to the sharp rise in oil prices, and the weakening of the US dollar, to which most Gulf currencies are effectively pegged.
Inflation in the UAE surpassed 14 per cent last year and 11 per cent in 2007. It stood at nearly 9.4 per cent in 2006 and was above six per cent in 2005.
At 2.5 per cent this year, the rate could dip to one of its lowest levels since 1990, when it was as low as one per cent.
Officials have blamed both internal and external factors for the escalating inflation over the past few years, mainly a surge in rents and food prices, and a decline in the dollar's exchange rate against major world currencies.
Since they are pegged to the dollar, most Gulf currencies recorded nominal declines against the currencies of their key trading partners. This has led to an increase in the value of imports from those countries.
High inflation in the UAE was accompanied with a surge in the economy triggered by massive oil export earnings, which peaked at around $90 billion (Dh330bn) in 2008. In contrast with the previous years, 2009 will see a sharp fall in both GDP growth and oil income as a result of falling crude prices and the UAE's output.
"The GDP growth in UAE is all set to witness a decline from its high growth period between 2000 and 2008," Markaz said.
"The average real gross domestic product growth recorded during this period has been at 10 per cent.
"The UAE central bank expects the real GDP growth to be at three per cent for 2009. We estimate growth at between 0.5 and one per cent," it said.
Markaz said slower growth in the UAE would affect the performance of its banks and other companies in 2009 after most of them escaped the fallout of the global credit crunch and made higher profits in 2008.
Sector-wise, the telecommunication, power and construction segments cushioned the effect by recording a growth of 35, 86 and 62 per cent.
Etisalat reported a 19 per cent growth but its Q4 2008 earnings slumped by around 20 per cent. In the power and utilities segment, Abu Dhabi National Energy recorded a 89 per cent increase in profits even though its Q4 2008 income declined by nearly 45 per cent, according to Markaz.
In the construction segment, Arabtec holding witnessed its full year profits increase by 77 per cent. But weakness in the segment was visible in its Q4 profits which slipped by around four per cent.
"Going forward, we expect the slowdown to continue further into the first quarter of 2009. Some of the sectors which have held up so far are expected to witness a deceleration. We expect construction segment to continue its Q4 2008 trend," it said.
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