However, the country’s economy, which will witness a strong rebound in the headline growth this year, will slow to 3.6 percent in 2011, before averaging 3.7 percent over the remainder of the five-year forecast period, said the report by companiesandmarket.com.

Despite high oil prices and some positive movements in the real estate market, which may inspire some confidence in the market, Dubai’s debt problems will continue to overshadow growth.

And resumption of construction activity will prolong an over-supply situation in the housing market, said the leading online business information aggregator.

For Abu Dhabi, the picture is somewhat brighter, with the infrastructure, oil and industrial sectors all having recovered in 2009 and 2010, said the report.

However, domestic demand remained low across the country, as is evident from still falling rents. A renewed slowdown in the US and Chinese economies, hurting external demand, will further hit the growth and financial stability of the country, it added.

According to the report, the implications of deterioration of relations with neighboring Iran in the recent past would be largely economic.

“At a time when Dubai is already struggling, the loss of a key export market is clearly detrimental. On the political side, however, we do not expect any major implications,” it said.

The report warned of a renewed slowdown in 2011 as base effects wear off.

“The country will remain vulnerable to external developments, depending on high oil prices, trade and tourism to compensate for a still shaky domestic investment environment,” it said.

The financial sector is likely to remain very sluggish and risk averse, with the debt restructuring process continuing, said the report, adding that more company defaults are also expected.

“Though the investment climate improved in recent months, the markets remain subdued. And another nasty financial surprise could derail this nascent confidence,” the report forecast.

Dubai Holding Commercial Operations Group, a real estate and hospitality group owned by the emirate’s ruler, recently secured a two-month extension on a $555 million revolving credit facility that matures this month. “However, It is not clear how it will deal with its remaining $12 billion of debt,” the authors of the report said.

Referring to the case of Dubai International Capital, which recently appointed Deloitte to review the value of its UK assets, the report hinted that things are not so rosy on the economic front.

“Even if these two conglomerates secure a reasonably favorable deal such as that agreed between Dubai World and its creditors, it is still likely to mean substantial write-downs for creditors, which will keep investor confidence low over the rest of 2010,” the report added.