JEDDAH: A recovery in oil prices, a rally in global equity markets and a limited improvement in external financing conditions have all provided some relief to the UAE economy during the first half of 2009. But despite government support, the UAE economy is now expected to contract by 1 percent this year.
However, according to the Riyadh-based Samba Financial Group’s 2009 mid-year economic update about the UAE, improving global conditions and a recovery in oil production should see growth recover to nearly 3 percent next year.
“This year is likely to be a sharp reality check for the UAE prompting a healthy re-prioritization of the huge project pipeline, a correction in the overheated real estate market, and a wake-up call for banks.
However, although the large exposure to Dubai real estate may continue to act as a drag, we expect that the current actions being taken by the authorities, banks, and corporations to strengthen and rebalance their positions, will ensure that the UAE is well placed to take advantage of improving global conditions in 2010,” Howard Handy, chief economist at Samba, said.
While there have been some positive developments, the UAE economy continues to face numerous challenges. Despite increased use of public funds, projects continue to struggle to secure financing, and many are being put on hold or canceled.
The crash in the Dubai real estate sector continues to be a major drag on the economy. According to Meedprojects, ambitious plans made during the boom years have resulted in a project list approaching $1.3 trillion in April, equivalent to nearly six times the GDP.
Of this most (86 percent) are construction projects, primarily connected with residential and commercial real estate.
Meedprojects reported recently that $364 billion (28 percent) of projects are already on hold or canceled, almost all of which are under construction.
However, liquidity remains tight and investment activity curtailed, particularly in real estate where prices have fallen sharply.
The withdrawal of foreign deposits and curtailed access to international capital markets continued to weigh on UAE banks in the first half of the year. However, with strong government support, liquidity conditions are slowly improving.
Meanwhile, the retail, trade, and tourism sectors continue to be hit by the global recession, and the continuing departure of expatriate workers who have lost their jobs is further compressing demand. The UAE authorities have taken a strong and multi-pronged approach to dealing with the global crisis and to mitigate its impact on the economy.
“Despite the still difficult external financing environment, the UAE will not allow any defaults. Having saved a large proportion of the oil windfall of recent years, ample public funds are available to meet all debt obligations, and recovering oil revenues will swell resources further,” Handy said.
New bank deposits are apparently building up as confidence improves, boosted by the rally in local and world stock markets since March, and as funds previously destined for the real estate market now find their way into banks. By May deposits had risen by 5.5 percent from the start of the year. With liquidity improving and inflation falling sharply, deposit rates offered by banks have begun to retreat from the 6 percent highs offered in January, to around 3.5 percent. With year-on-year inflation under 2 percent in April, real deposit rates have now turned positive after years of negative returns, providing additional incentive to save. The improving deposit position has helped bring the aggregate loans/deposit ratio down to 103 percent in May, with some banks reporting stronger improvements to below the 100 percent mandated by the central bank.
The Samba report said general slowdown in economic activity and shrinking liquidity has already been reflected in a steep fall in broad money growth. Recent data from the central bank show that, having grown at an annual rate of between 25-45 percent during 2007-08, growth in M2 (essentially money in circulation and bank deposits) fell to just 6.7 percent in May this year.
Despite higher government spending, with oil prices now expected to average $57 a barrel in 2009, the consolidated fiscal accounts for UAE are projected to remain broadly in balance after years of huge surpluses, the report added.
