The UAE, largely led by Dubai given the nature of the economy and the lifestyle offered, is seeing a stronger recovery in the non-oil economy than originally expected at the beginning of the year. At EFG-Hermes we have increased the UAE's real non-oil GDP forecast for 2011 to 3.9 per cent in consequence.
Naturally, the main driver of export earnings will still be oil, with the sharp rise in price and the increase in production, whose impact on the domestic economy will be through government spending from Abu Dhabi.
But political uncertainties in the Mena region are resulting in stronger performance in the non-oil external sector, and have filtered into the domestic economy too, which until recently had not seen any notable positive catalyst. This aspect includes some initial support to the sectors central to the economic crisis, including real estate, and increased liquidity in the banking sector. Thus, the recovery which was fragile in 2010 should gain strength and momentum by the outturn of 2011.
That said, there are concerns still in the shorter term as to a weak investment environment overall in the UAE, also a weak credit outlook and continued issues of asset quality, and greater external risks (notably from Europe) given Dubai's external nature and debt position, while the restructuring of ‘Dubai Inc.' debt has substantially eased that issue (see box, ‘Debt progress').
Yet, in the longer term, the regional developments help to cement Dubai's position as a service hub for the wider region. Additional support will come if the UAE can move forward with implementing further, slated reforms to improve the business environment and legislation related to the real estate sector.
A rise in sentiment is notable in Dubai on the ground, although data continue to be limited. Directly, there are strong indications of an increase in regional companies, especially small- and medium-sized, having applied for licences to set up offices in Dubai. Equally, there are indications that a number of larger international and regional corporates have moved some of their regional staff to their UAE offices.
Moreover, there are signs of individuals from across the region purchasing properties in Dubai as a second ‘safety' home. That has resulted in a moderate increase in sales transactions and prices in some high-end areas, although overall the oversupply in the market continues (see box, Real-estate picks up). Nevertheless, we see this as vital initial support for the real estate sector, which is so inter-related to other areas of the economy. Moreover, there are indications from retailers that there has been an increase in the sale of household-related goods, including durables and furniture, in which activity has been weak since the crisis at end-2008.
In turn, these improvements have benefited sentiment within the UAE among individuals highly exposed to the real estate sector, particularly because it was not expected.
Accelerated pace of growth
We expect to see non-oil external growth being driven by the service sectors. Tourism, transportation and logistics had already begun to recover in 2010. However, the regional developments have accelerated the pace of growth. The number of tourists entering Dubai grew 14.0 per cent year-on-year in the first half of 2011. Hotel occupancy increased to above 80 per cent for both Dubai and Abu Dhabi, and has evidently risen also during the summer period, with GCC tourists veering away from traditional summer destinations including Egypt, Lebanon, Jordan and Syria. Their higher volume is also bolstering consumption, with retailers indicating that the average spend per tourist has increased, partly by way of sentiment improving through higher state spending. Thus we see Dubai, and the UAE generally, benefiting from the regional increase in government expenditure.
The trade and logistics sector is also on an upward tack, as reflected in the activity data of Dubai Ports World, which has seen a notable jump in UAE port volume activity. We believe that's a result of shipments being diverted via Dubai ports again due to the regional uncertainties, producing an 11 per cent year-on-year rise in container traffic in the first half of the year. A rise in non-container traffic, as well, reflects an increase in UAE domestic activity.
With the strong rebound in the traditional sectors of the economy (tourism, hospitality logistics and trade) we are seeing increased job hiring in these sectors, which is again feeding into the private consumption environment. The data and accounts from the banking sector are suggesting that these more traditional external sectors of Dubai are driving the gradual rise in new corporate credit growth.
However, we continue to see a weak recovery outlook for credit growth without momentum building up in Abu Dhabi's investment programme, and banks continue to remain cautious about providing new lending to the construction and real estate sectors.
Resources directed to debt management
Meanwhile, we continue to see a relatively weak increase in total consolidated government spending of 6.8 per cent in 2011. With the continued high debt and debt servicing levels, fiscal resources can be expected to be directed towards debt management in Dubai, and not provide much support for the economy in the medium term.
The Dubai budget for 2011 has spending falling by 4.9 per cent in 2011 from the 2010 budget figures. Abu Dhabi will probably drive spending growth, led by current expenditure, although it has yet to release a budget for 2011. With a focus instead on strengthening fiscal management and discipline, including of the government-related entities (GREs), overall project development spending continues to remain weak.
The scale and timing of projects are being reconsidered. On the ground, contractors indicate that projects in Abu Dhabi are still being cancelled or downsized, while new projects are taking time to be implemented. Anecdotal evidence also suggests that the employment nationalisation programme is impacting progress with projects.
So overall investment activity remains weak, though increased infrastructure investment in the Northern Emirates may be seen, notably in respect of shortages in water and electricity supply, aimed at lowering the risk of social unrest. The UAE has announced a dirham 5.7 billion investment in electricity and water distribution in the area.
Concerns about ‘Dubai Inc.' meeting its debt servicing requirements have receded, with a substantial part of the debt being restructured. However, Dubai still remains vulnerable to a marked deterioration in access to foreign funding for a sustained period, given its significant refinancing obligations. Access to capital markets and at improved rates have been central to improving the debt profile.
Both Dubai and Abu Dhabi government-related entities (GREs) have substantial debt repayments to make in 2012 of over $20 billion, according to IMF estimates.
So far market indications have suggested that there remains foreign interest for refinancing Dubai Inc. debt, supported by the policy of part of the principal being paid. The Dubai government is likely to issue more government bonds once global markets have settled.
The announcement in June 2011 of a change to the visa regulation linked to property ownership was an important step in providing further momentum to the trend started by the regional political developments, although the legislation has yet to be implemented.
Under the new legislation the duration for a residency visa for property owners has been increased from six months to three years. That increasing of the visa tenure is significant in raising the attractiveness of UAE property investments to regional buyers.
There are signs that mortgage lenders are loosening their lending criteria and increasing lending. This is still towards relatively strong low-risk cases and on a relatively low loan-to-value basis. Moreover, with the overall fall in interbank rates (supported by the rise in deposit rates), a number of banks have reduced their mortgage rate from mid-2011, which we believe could help to push up mortgage transactions from the second half of 2011.
Both these developments are supporting the increase in domestic demand for house purchasing (i.e., not from overseas investment buyers, but for end-users), with the expectation that the market is close to reaching bottom. Some banks and housing financing organisations (Tamweel) have indicated that they are looking to provide mortgages for non-residents from selected countries (mostly from developed economies).
The writer is Chief Economist, EFG-Hermes