Rosy outlook for the UAE in 2008
The outlook for the UAE economy in 2008 is rosy. The economy is expected to maintain its strong growth of nine per cent real gross domestic product (GDP) next year and will continue to follow a similar trajectory until 2010, said a report by investment banking firm EFG-Hermes.
The year ahead will be a stronger one for the UAE stock market, supported by a backdrop of robust earnings growth, principally in non-financials, high oil prices, abundant liquidity, and a steady real estate market.
The short- to medium-term economic growth outlook for the UAE economy is very strong and the report forecasts nine per cent real GDP growth in 2008 and high single-digit growth until the end of the decade.
However, real GDP will slow to 8.6 per cent in 2007 as oil output declines in response to Opec production cuts. Production in the first 10 months of 2007 fell by 2.5 per cent year-on-year. With continued strong growth in imports, net exports will make a negative contribution to real GDP, causing it to slow. Nominal GDP growth will decelerate as the price of oil increases more slowly than in 2006.
“We forecast nominal 2007 GDP growth will slow,” the report said.
Investment will be an important driver of economic growth until the end of the decade and beyond, with Abu Dhabi playing an increasingly important role, said the report.
In Dubai, investment increased by more than 18 per cent, steady from last year’s growth. Investment in the other emirates, at a total 35.1 per cent, also grew strongly, but from a markedly lower base. Nevertheless, the growth reflects the fact that other emirates are also focusing on investment and widening their economic bases in manufacturing, refining, tourism and real estate and other areas.
Abu Dhabi has embarked on a wide-ranging investment programme, with projects worth more than $300 billion (Dh1.1trn) – more than 300 per cent of estimated 2006 GDP – ongoing or announced. Key investment areas include real estate, energy, industry, especially petrochemicals, plastics, aluminium, steel and glass, tourism and infrastructure.
Population growth will accelerate to 9.1 per cent annually from 2007 to 2012, with the UAE’s total population rising to 6.7 million in 2012 from 4.1 million in 2005. The national population will continue to grow rapidly, by an estimated 3.2 per per cent per year until the end of the decade before accelerating to 3.5 per cent until 2020. The main growth driver will be an increased inflow of expatriates. This acceleration will be fuelled in particular by Abu Dhabi as it implements its investment and development plans.
On the macro front, the report forecast the fiscal surplus will decline from historical levels due to spending growth outpacing revenue growth (assuming a Brent price of $73.1 in 2008 and $67.5 in 2009 against $70.5 in 2007). It will remain strong at 23 per cent of GDP in 2008 and 19.7 per cent of GDP in 2009.
Inflation rate is projected to declined to 7.6 per cent in 2008 and 7.2 per cent in 2009, with rental inflation in Abu Dhabi preventing any significant fall over the short- to medium-term, despite the expectation of moderation in Dubai in 2008 and more so in 2009. A revaluation of the dirham against the dollar or move to a currency basket will also help limit imported inflation to a degree.
The extent of the decline in inflation, however, will be limited by rental inflation in Abu Dhabi. However, these projections are subject to factors like constraints on supply of goods and labour.
“The main risk to our outlook is further constraints on the supply of goods and labour, though broader risks include a sharp decline in the oil price and geopolitical tension with Iran. The most important development on the external front is likely to be a shift in the currency peg and/or the currency regime. We believe it will be of the order of three per cent to five per cent or could be of a greater magnitude. We see a greater than 60 per cent probability of either a revaluation of the dirham/dollar peg or an independent move to a currency basket in the first half of 2008,” it said.
The report said a substantial increase in IPO activity is expected in 2008, driven by both higher prices and volumes. The listing of DP World suggests further part-privatisations are in the pipeline and a recent change in regulations – reducing the minimum level of free float required to conduct an IPO from 55 per cent to 30 per cent – should spur the listing of family businesses.
“The increase in listings should provide greater sectoral breadth to the market. We see new listings as critical in generating new investment opportunities and attracting fresh liquidity,
particularly from Western institutions. We would therefore view the failure of a number of IPOs to materialise as being materially negative for the UAE markets,” said the report.
The report anticipates more focus on corporate governance reducing the information gap between listed companies and shareholders. “We believe that a divergence will occur between companies exhibiting good and bad corporate governance practices. We expect positive news-flow next year to help reverse investor sentiment and thereby close the divergence between the Abu Dhabi and Dubai indices.”
The report is bullish on 2008 and expects the share price momentum seen in the past two-thirds of 2007 to be sustained through a further influx of Western institutional investors, ongoing liberalisation of ownership, a substantial increase in IPOs, and a pick up in M&A activity.
“Over the course of the year, we expect to see a greater focus by investors on small and mid cap ideas, stock picking, corporate governance and transparency, all of which will be key in determining share price performance. Our target PE multiples of 16.1x 2008 and 14.0x 2009 provides us with potential upside of 23 per cent to 42 per cent,” it said.
The UAE stock markets, which have been on a downward slide in the beginning of 2007, have been seeing some rallies which have been helped by investments from Western institutions.
They have been instrumental in driving markets higher in 2007 and their importance is expected to grow in 2008, with the bias moving increasingly from “fast money” proprietary desks and hedge funds to long-only mutual funds.
“As the year progresses, the increased penetration of Western investors should result in an increased focus on small and mid caps and stock picking in general, greater demand for corporate governance, and higher correlation with global emerging markets – although we do not believe the extent of the latter will be sufficient to remove the benefits of diversification for international investors,” it said.
The rise in inflation and the need for greater monetary control will be the key challenges facing the economy, the report said.
-- Real estate prices witnessed a slower rate of appreciation in 2007 than in 2006. “We have revised our forecasts, given that in 2007 the supply of residential units fell markedly below our initial expectations. Real estate prices will increase 5-10 per cent on average in 2008, followed by a cumulative decline of 15 per cent over 2009-2011.
-- A substantial increase in IPO activity is expected in 2008, driven by both higher prices and volumes. The listing of DP World suggests further part-privatisations are in the pipeline and a recent change in regulations, reducing the minimum level of free float required to
conduct an IPO from 55 per cent to 30 per cent, should spur the listing of family businesses.
-- Earnings growth will continue to be the primary driver and momentum-driven behaviour will continue, with some herding behind the Western institutional flows. “Our expectation of a recovery in Saudi Arabia in 2008 suggests the re-entry of [liquid and active] Saudi retail investors into the UAE. If the Saudi markets were to open up to foreign investors, liquidity and the attention of Western institutions would be likely diverted from the UAE, albeit for a while,” the report said.
-- The mergers and acquisition (M&A) activity will increase in 2008. Fragmented sectors such as cement and insurance are the most likely candidates for consolidation and vertical integration, while companies operating in saturated sectors such as real estate and telecoms are likely to expand into related sectors and geographies. The banking sector is likely to see elements of both.
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