The country’s economy contracted 1.6 percent on the back of global financial turmoil in 2009, its worst since 1988, as oil prices plunged and a local property bubble burst, straining banks in the world’s No. 4 crude exporter.
“It is a source of concern for everybody in the world so it is a source of concern to us as well because Europe is a very important trade and business partner for the UAE and worsening conditions economic and financial will reflect on everybody,” Central Bank Governor Sultan Nasser Al-Suweidi said on the sidelines of a statistical conference.
The country’s growth recovered to 1.4 percent in 2010 as oil prices rose but the hydrocarbon-reliant economy continued to grapple with the fallout of a $25 billion debt restructuring in Dubai’s flagship company.
A Reuters poll had suggested that crude prices above $100 per barrel as well as strong trade flows with Asia and higher government social spending would boost growth to 3.8 percent both this year and next.
“If we continue this up and down situation in the US and Europe, our (GDP growth) figures should hover around three percent. That will rely on what will happen with the oil price and what will happen in the political scene in the region and the Middle East,” Economy Minister Sultan bin Saeed Al-Mansouri said at the same event.
“If, and that is a very important if, the situation in Europe and in the US is corrected in a way that addresses the crisis in a very good way, my expectation is that the UAE economic growth could reach about four percent,” he said.
Analysts said that weaker oil prices, potential slowdown in trade flows and harder access to financing for sovereigns and corporates could undermine the UAE performance next year.
“It is not going to be like the contraction in 2009. We don’t expect that to recur in 2012 because Dubai is better placed to deal with the slowdown, and there are other underpinning factors such as Asian investments,” said Farouk Soussa, Middle East chief economist at Citi.
“An economy like Dubai with a very large refinancing schedule for next year is going to struggle to achieve that refinancing on good terms,” said Soussa, who slashed his 2012 growth projection for Dubai to around 2 percent from 6.2 percent due to European woes and US weakness.
Business and tourism hub Dubai, which accounts for 28 percent of the UAE economy, faces $3.8 billion in major state-linked debt redemptions in 2012.
Uncertainty also remains about ongoing talks to restructure $10 billion in distressed debt of Dubai Holding entities.
However, the UAE, the second largest Arab economy, does not need to introduce any new liquidity or provisioning measures for its banks, the central bank’s Al-Suweidi said.
“There is no need for that,” he said when asked whether new liquidity measures were necessary.
“Why do you take action when there is absolutely no need? These are fluctuations and we are capable of dealing with fluctuations from our own sources, which are customer deposits, corporate deposits and huge capital and reserves of UAE banks,” Al-Suweidi said.
Exposure of UAE banks to sovereign and private sector debt in Europe is small and their capital adequacy ratio was around 11 percent, he said in October.
Asked whether the UAE considered following Austria’s central bank, which made a deal with China to invest into some Chinese currency assets, Suweidi said: “Well, it depends what is the most suitable for the central bank of the UAE.”
“If it is strategically, I cannot comment in advance about it, so we will leave it for when the time comes,” he said.
Inflation in the UAE is expected to stay between 1.8 and 2.0 percent next year, around the same level expected for 2011, Al-Mansouri also said, adding the ministry would keep price controls on basic commodities launched earlier this year.
