The UAE's real gross domestic product will grow by 2.4 per cent this year despite the expected 0.5 per cent reduction of global GDP, says Shuaa Capital.
"UAE GDP will grow at 2.4 per cent regardless of the negative growth in the hydrocarbon sector as production levels are cut and prices decline," said Head of Research Mahdi Mattar. "And we expect the non-hydrocarbon sector to grow at a higher rate – 4.2 per cent."
"The UAE will be able to achieve growth, while recent forecasts show global GDP will shrink by around half a percentage point this year," he said.
Shuaa outlines its expectations for a number of major economic developments on several fronts in its UAE Equity Markets Vision for 2009.
Another significant element is the expected decline in inflation rates this year to an overage of 7.1 per cent. However, inflation is expected to vary from one emirate to another. The decline will be sharp in Dubai and the Northern Emirates, while in Abu Dhabi inflation will average 12 per cent over the year.
"We expect the UAE's population to decline slightly by around a percentage point this year," said Mattar. "However, this decline will vary as Dubai population will decline by five per cent and the population in Abu Dhabi will grow by around three to four per cent."
Shuaa believes the UAE's stock markets will start to recover by the second half of the year, or at least enjoy a degree of stability in some sectors, particularly the telecoms sector. "While we expect a poor earnings outlook to be a persistent headwind for stocks throughout 2009, especially during the first half, a sluggish economic recovery towards the second half will allow markets to record gains of about 21 per cent in 2009."
Mattar said corporate earnings would retreat by 9.4 per cent this year compared with a projected aggregate growth of around 20 per cent in 2008.
"We expect aggregate earnings to shrink mainly because of weaker results for both the banks and Dubai real estate companies. Slower balance sheet growth in the banking sector as well as deterioration of asset quality would imply higher provisioning and a decrease in earnings of about 14.4 per cent in 2009.
"We expect the real estate sector to have a varied earnings growth. While main Abu Dhabi companies will witness flat to slightly negative growth, Emaar Properties and other Dubai realty firms are expected to see a decrease of about 10 per cent in their 2009 earnings.
"It is important to note the correction in the equity markets and in the real economy, represented by the real estate market, has been a recent event in the UAE starting in the third quarter of 2008. Bad economic news and negative earnings growth have just started to be announced," he said.
Mattar also highlighted the lack of transparency and regular UAE economic indicators, which he said fuelled the situation because the market priced stocks for the worst scenarios.
Etisalat and du, which plunged in value during the recent panic retreat on the markets, should act as defensive investments due to their stable outlook in 2009.
Shuaa's Vice-President of Research Simon Simonian said: "Telecom stocks were the safe resort in global financial markets during the crisis because they have strong assets and revenues. They suffered in the UAE, but after the markets stabilise we will see appreciation in telecom stocks."
DUBAI REALTY TO STABILISE
The report says the real estate sector is facing major changes and will continue to witness upheaval during the 2009-2010 period, especially in Dubai and Abu Dhabi.
Prices in the Dubai real estate sector are expected to stabilise by the end of 2009. However, the prices of residential units may face continuous pressure during the first half of the year.
Roy Cherry, Vice-President of Research at Shuaa, said: "Prices in Dubai have declined by around 30 to 40 per cent compared with their peak in July 2008. With different factors in the market, prices can continue to go down by between 60 and 70 per cent compared with the peak before they stabilise by the end of the year."
Cherry identified several factors that would continue to create more pressure on real estate prices, particularly in the residential segment.
"We were expecting a correction market this year. However, the global financial crisis created a severe trend in the market which is behaving in a crash-like style.
"Mortgage financing dried up, increasing interest rates, and the number of transactions dropped to very low levels. Dubai's population is expected to decline by five per cent and new buildings in the pipeline will lead to more corrections in the market. We expect 80,000 units to enter the Dubai housing market within the next two years while demand drops."
Cherry said the Dubai real estate sector would be able to recover when it reached a bottom. "We expect the banks will start to ease their mortgage conditions by the year-end for several reasons. The sharp decline in prices will reduce risks in the sector as end-users will be able to buy houses at a discount of about 50 per cent compared to the peak and bank financing will be cheaper.
"There will be a new trend in the market as there will be variation among different areas in Dubai. Due to the high demand in the past, differences between different areas were slight, but we will see major differences among areas according to their location and the quality of properties," he said.
Cherry said he expected rents in Dubai to fall by around 20 per cent over the next two years. "This decline will attract some of the population in Sharjah to live in Dubai and this will affect the real estate sector in Sharjah."
The situation in Abu Dhabi is expected to be different as around 30,000 new units are expected to enter the market. However, prices are projected to decline due to the retreat in Dubai.
"This will be a psychological retreat because the demand in Abu Dhabi is still higher than the supply," said Cherry. "Despite the decline in the prices of properties, rents in Abu Dhabi will continue to grow by around 10 per cent this year.
"Prices in prime areas in Dubai reached Dh4,000-5,000 per sqft, while in Abu Dhabi they reached Dh2,500. With the sharp correction in Dubai we expect prices in prime areas in both emirates to move closer."
He said the delivery of new projects in Dubai would lead to a retreat in the occupancy rate from the current 98 per cent to around 80 per cent in 2010, while the occupancy rate in Abu Dhabi would continue at between 90 and 95 per cent.
BANKS REDUCE EXPOSURE
The banking sector's loan book is expected to grow by three per cent this year, while the growth in deposits will reach eight per cent, says the report.
Shuaa Senior Associate Sofia El Boury said: "The days of 30 to 40 per cent growth in loans and deposits in the UAE banking sector are over. UAE banks have just ended a phase and are entering a new phase that is creating several challenges.
"The negative real interest rate environment, easy and cheap access to funding, the booming real estate sector and lax regulatory and supervisory frameworks all led to robust growth in financing during the first half of 2008. The UAE banks' loan book recorded an unprecedented 49 per cent year-on-year growth last June. "While the banks' exposure to mortgage financing remains limited, according to the Central Bank's latest statistics their direct exposure to the realty sector is about 10 per cent of the system's total deposit base. We believe highly leveraged tier three developers are likely to be at the forefront and be the first to fail to repay their obligations."
El Boury said she expected the interbank rates to decline to around three per cent this year after reaching 4.8 per cent last October.