Abu Dhabi: The UAE economy suffered a sharp downturn following the collapse of US investment bank Lehman Brothers five years ago, which led to a full-blown global financial crisis and worldwide recession. Since then, the economy has bounced back but the hard lessons from the crisis are well learnt, say experts.
“Economic activity (in the UAE) has been picking up steadily since the trough in 2009 when economic activity contracted by -4.8 per cent. 2010 saw a return to positive growth of +1.7 per cent. Real gross domestic product (GDP) growth rose to 3.9 per cent in 2011 and 4.4 per cent in 2012,” Giyas Gokkent, chief economist at National Bank of Abu Dhabi (NBAD), the emirate’s largest bank by assets and market capitalisation told Gulf News.
Gokkent said the UAE’s average real GDP growth was 1.6 per cent per annum between 2008 and 2012, significantly below the long term average. The average growth rate between 2002-2012 was 4.2 per cent per annum, while the average non-oil real GDP growth was 1.9 per cent per annum between 2008 and 2012, he added.
Gokkent said oil and natural gas remains a key sector and it accounted for 46 per cent of the 4.4 per cent growth registered by the UAE economy in 2012.
“Wholesale and retail trade, construction, real estate, transport and communication, manufacturing, financial services, and government services are the most important categories in terms of share in overall activity. The main contributors to output growth in 2012 amongst these were real estate, financial services, government services, and transport/communication,” said Gokkent.
The UAE’s real estate sector took a hard blow in the aftermath of the global economic slowdown. However, the trend has been reversed now, and property prices are being quoted near their pre-crisis levels or higher. Tourism, one of the key contributors in the country’s economic growth is also booming.
According to London-based property broker Knight Frank, Dubai’s property market recorded the largest year-on-year average price increase in the second quarter.
Knight Frank’s Global House Price Index stated the average property price in Dubai surged 21.7 per cent between second quarter 2012 and second quarter 2013.
“The property bubble which burst in 2008 occurred against the background of a significant housing shortage. Introduction of new housing supply since then eliminated the shortage. Estimates indicate that the addition to the housing stock was 6 per cent and 4 per cent of the existing stock in Abu Dhabi and Dubai, respectively, in 2012 and will be circa 8 per cent and 9 per cent, respectively, in 2013. I believe, there is room for further price gains given decent rental yields (average gross rental yield was 7.5 per cent in Abu Dhabi in selected locations. In Dubai, average gross yield was 7 per cent) and historically low financing costs, but I don’t currently see the ingredients for a bubble coming together,” said NBAD’s Gokkent.
Furthermore, Dubai welcomed more than 5.58 million visitors during the first half of this year, representing a 11.1 per cent year-on-year increase, according to the latest figures from Dubai’s department of tourism and commerce marketing (DTCM).
Abu Dhabi too, has seen a surge in tourist arrivals in recent months, which has helped support the wider economy. Last week, Abu Dhabi Airports Company (Adac) said passenger traffic at the Abu Dhabi International airport increased 4.8 per cent on year in July. In a statement, Adac said in July, the airport handled 1,399,695 passengers, compared with 1,335,088 in July last year. The steady growth in passenger traffic can be attributed to the airport serving as a hub for passenger travel to multiple destinations across the globe.
Gokkent said the UAE’s medium-term growth and diversification prospects are promising, using a strategy to exploit comparative advantages in terms of massive energy endowments, abundant sun/sea, and virtually no taxation.
“Abu Dhabi continues to expand its hydrocarbon production capacity. Meanwhile, its economic diversification strategy emphasizes manufacturing, petrochemicals, transportation and aviation, renewable energy, cultural tourism, healthcare, education, and financial services, among other sectors. A federal law was recently issued to create a financial free zone under the name “Global Marketplace Abu Dhabi” to position Abu Dhabi as an international financial centre. Meanwhile, Dubai is maturing as a service hub for the region and recently announced new plans in real estate and tourism. The financial services sector is a facilitator in the drive to greater diversification and these developments will naturally encourage concomitant growth in the financial services sector,” he added.
The UAE has been on a sustainable growth path, also due to the stability and the liquidity of its banks where lending activity has been picking up.
In 2008, the UAE banks had landed in a serious liquidity squeeze, after foreign banks withdrew Dh100 billion worth of funds from the local banks placed with them to make quick gains from the much-anticipated de-pegging of the UAE dirham from the US greenback, which did not happen. That move coincided with the global financial crisis that forced international banks to withdraw their surplus funds, deposits and investments from international markets, to boost their shrinking liquidity at home.
The Central Bank of the UAE and the Ministry of Finance in total made available Dh120 billion to the local banks to provide the much-needed liquidity boost. In October 2008, the finance ministry poured Dh25 billion into bank deposits to boost liquidity at banks, the first tranche of the Dh70 billion rescue facility. It deposited another Dh25 billion into banks in November the same year.
As matters stand, top UAE banks have already paid off the emergency loans taken from the federal government at the peak of the global financial crisis. The second-quarter earnings of top UAE banks last month, pointed towards a healthy growth in profits and showed an upsurge in their liquidity levels.
Chiradeep Ghosh, senior analyst at Bahrain-based Securities & Investment Company (Sico) told Gulf News they are maintaining a moderately positive outlook on the UAE economy over the medium-term.
“Recovery in the real estate and tourism sector, pro-development government policies and UAE’s perceived safe haven status, supports our moderately positive outlook on the UAE economy over the medium-term,” said Ghosh.
