JEDDAH: The world is grappling with the most dangerous financial shock since the 1930s and the Gulf countries are not exempt. The United Arab Emirates (UAE) has not escaped the impact of the current global financial turmoil and has seen its stock prices slump, real estate sector weaken, access to external finance curtailed, and domestic liquidity conditions tighten.
But the UAE’s strong macroeconomic fundamentals and quick policy response to the global financial crisis should — despite the deep global recession and sharply lower oil revenues — help support a positive growth momentum this year, the Riyadh-based Samba Financial Group said in its report yesterday.
The outlook for 2009 is challenging, particularly for banks, real estate, tourism, project financing, and Dubai government-related entities needing to rollover maturing loans. The UAE, with a total population of 4.5 million and an expanding economy approaching $273 billion in 2008 is the second largest economy in the Arab world after Saudi Arabia. However, real GDP growth will fall steeply. Efforts at providing a fiscal stimulus — projected spending in the 2009 federal and Dubai government budgets is up 21 and 42 percent respectively — and liquidity support to banks will certainly help, but inevitably lower credit growth as banks undergo a period of deleveraging will curtail broader economic activity, the report added.
Up until the middle of 2008, the UAE economy continued to grow rapidly, with high oil revenues helping to fuel an infrastructure and real estate boom which had turned the UAE into the GCC’s pre-eminent project center with a reported $990 billion worth of projects announced, planned or under way, according to statistics tracked by MEED Projects.
Despite a sharp deterioration in conditions during the third quarter of the year, real GDP growth is estimated to have risen to close to 7 percent in 2008, boosted by strong non-oil growth and a rebound in oil production.
However, this overall growth estimate masks a dramatic turnaround in the economy during the second half of 2008 when the UAE finally succumbed to the global financial crisis, which had been gaining in intensity since the bursting of the US subprime mortgage market in mid-2007.
But many of the UAE’s large-scale projects are likely to be postponed or canceled, particularly in the real estate sector where reports suggest up to $260 billion worth of projects have already suffered such a fate.
Although private sector external borrowing has increased rapidly, the UAE retains a large net external creditor position. The report said available estimates put the UAE’s total external debt at around $150 billion at the end of 2008, equivalent to 55 percent of GDP (gross domestic product). Using conservative estimates of the UAE’s total foreign assets of $405 billion, this gives a positive net external asset position of $255 billion, equivalent to 93 percent of GDP.
The UAE’s oil output is projected to drop by 12 percent in line with new OPEC policies to curb production.
The UAE holds the fifth largest proven oil reserves in the world, sufficient to last for 90 years at current production levels. Similarly gas reserves of 6 trillion cubic meters (3.4 percent of world total) are expected to last over 100 years.
Overall real GDP growth is expected to slow sharply to less than 1 percent in 2009. “Although prospects are challenging, the UAE is well equipped to weather the global downturn,” said Howard Handy, general manager and chief economist at Samba.
Despite lower oil prices and output, the fiscal and current account balances are expected to remain in surplus providing welcome financial ballast. In addition, the UAE has large foreign assets to draw on, although it is clear that these too will have suffered from the collapse in asset prices worldwide.
“The authorities have been quick to respond to the evolving liquidity crunch and have moved to inject liquidity into the banking system and take steps to fill the emerging funding gap given the reduced access to international capital markets. Together with fiscal stimulus packages this should prevent the economy from slipping into outright recession,” Handy said.
With only limited oil resources Dubai is investing heavily in a rapid diversification and growth strategy focused on developing itself as a trade, financial, tourism and services hub. The success of this strategy has drawn in increasing amounts of foreign investment and expatriate workers, generated a long real estate boom, and has established Dubai as a globally recognized “brand”, the Samba report said.
Stock markets in Abu Dhabi and Dubai had already been falling steadily during 2008 when the massive global sell off saw markets around the world crash in early October. This dragged the UAE stock markets down further with the Dubai and Abu Dhabi market indices ending the year off 72 and 48 percent respectively.
During the first two months of 2009 UAE stock markets have continued to slide, with the Dubai index down 12 percent and the Abu Dhabi index down 9 percent.
“The outlook for the year is expected to remain sluggish as the global economy continues to struggle and oil prices remain weak, dampening investor sentiment,” Handy said.
