The banking sector's results in the last quarter will be among the key deciding factors determining investment decisions in the coming months and it remains to be seen to what levels provisions – which weighed heavily on balance sheets in 2009 – prevail this year, according to an economic analyst.
Tudor Allin-Khan, Chief Economist, Al Futtaim HC Securities, thinks provisions are unlikely to continue throughout the year.
"You might see some provisioning through the second quarter. But it will taper off and not be a major factor through 2010," he told Emirates Business in an interview.
Allin-Khan is also positive on the GCC's growth story and feels the region has strong fundamentals and long-term value. The year 2010 will see a stronger recovery and reduced risk aversion, he said.
What is your 2010 outlook for the GCC?
We have to go back to the start of 2009. At that time there were risks in the market: the financial crisis and the dramatic slowdown had already started in the United States and had moved to Europe and rest of the world.
In 2009, governments implemented support measures and reacted quickly. It brought about an end to the financial risk and the start of a financial recovery. This year is about the recovery moving forward, about taking a second step forward. Probably, we are moving at a faster pace.
If you look at Asian economies, such as China, their robust economic growth is driving global economic growth. We will see stronger growth from the GCC as well. The year 2010 may not be the fastest for economic growth but it will not be a situation of slowing mechanisms the way we saw in 2009.
Do you think government spending will be the key driver of growth?
A lot of economies have implemented fiscal support packages. We see lot of support in the GCC. Though the economies have reduced spending to cap the deficit, which is good, you would still see huge amounts of spending directed towards infrastructure. It is very important and will drive economic growth quickly by increasing employment and spending. Government spending will be a driver of growth.
Do we not stand a risk of high inflation with the stimulus from governments increasing money supply in the economy?
The UAE economy was greatly impacted by the economic boom. We had a booming construction sector and oil prices were high. And, when everything came to a halt, all these factors dropped. Rents dropped by 50 per cent and there was a sharp drop in inflation, too. But then the government implemented support packages. It is a phase of recovery. You will not see deflation but there could be moderate inflation. We expect it to remain around two to three per cent in the UAE in 2011. It's a very good number. It represents the expectations you can have in the near future. It tells you where the prices would be, say, next year. We think there will be investment.
What is your forecast on growth for the UAE?
At the moment we are going by the IMF figures, which forecast two to three per cent growth. It could be 2.5 per cent.
Investors have been adopting a wait and watch policy before committing for the long-term. Are they confident about this region?
If you were a money manager, you would be sceptical. We say all that will be resolved over the coming months. People will wait to get more clarity. There is long-term value in this region.
Hedge funds, at present, are moving fast. They are very actively trading in equities as they see value in this economy. When you look from an investment point of view, you see fantastic opportunities within the equity market.
Does it mean that the short-term scenario is not very positive when it comes to the return of investor confidence?
We see investor confidence returning by the second quarter of this year. Annual results would have been declared by then and things would be much clearer. The second quarter will see higher investments in different sectors.
Which are the key trends you see as dominating the economic scenario in this region?
The first is the economic recovery. We expect continued government spending within the UAE and the GCC, which will benefit the construction industry. Besides, risk appetite will increase and oil prices will get better.
What are your expectations about the fourth quarter results for the UAE's banking sector?
That is weighing on the market at this point in time. Banks in Dubai are concerned about asset quality and increase in NPLs (non-performing loans). Those in Abu Dhabi are less concerned about this, as they have been stricter in their lending practices.
Do you expect provisioning to continue weighing heavily on balance sheets in 2010?
I don't believe provisioning will continue throughout the year. You might see some provisioning through the second quarter, but it will taper off and not be a major factor through 2010.
When do you see banks reducing their lending rates?
That will come through a decline in the risk that is perceived at the moment. Economic growth dynamics will be much stronger by the second quarter. The economy will be stronger and the uncertainty will reduce.
Which are the asset categories that investors will prefer this year?
This year it will be equity. It's about stronger economic growth and lower inflation. The environment will be better for equities. Valuations at the moment make them incredibly attractive.
PROFILE: Tudor Allin-Khan Chief Economist, Al Futtaim HC Securities
Allin-Khan has spent almost 12 years in the finance industry. In his present position, he is responsible for building HC's Middle East macro research product.
Prior to this, he spent 11 years in the City of London as an economist/strategist with a number of blue-chip investment banks.
Allin-Khan started his career as an economist at Flemings Investment Bank and worked with Lehman Brothers. He has also worked with HSBC and Morgan Stanley.
Allin-Khan graduated in economics and econometrics from the Bath University and is a CFA charter holder.
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