Dubai: The UAE’s and Dubai’s economic fundamentals are strong and the recent equity sell off is not linked to any potential vulnerability in the economy, according to Bank of America Merrill Lynch
“We do not view the sharp equity sell-off as reflective of broader macroeconomic systemic issues. Dubai’s economic recovery has become more entrenched, and the 2020 Expo bid provides upside potential,” said Jean-Michel Saliba, Middle East and North Africa economist at Bank of America Merrill Lynch.
The economic recovery is helped by high oil prices, support from the external sector, accommodative monetary policy, the rebound in the real estate sector, steady yet uneven progress on government related entities (GRE) restructuring and a mild fiscal consolidation drive.
After averaging 10 per cent annual growth from 2000-10 and a slump in 2009, real GDP growth was 4.6 per cent in 2013. Dubai’s externally driven sectors (tourism, manufacturing) led the increase. With a fading drag from construction and real estate activity, growth is likely to accelerate toward 5 per cent in 2014/15, in our view.
According Bank of America Merrill Lynch, Dubai government is committed to fiscal prudence. The Dubai Department of Finance (DoF) indicates the preliminary out-turn for the 2013 fiscal deficit has likely outperformed the target of Dh1.5bn (0.4 per cent of GDP). The 2014 budget also targets to narrow the deficit to Dh880 million (0.2 per cent of GDP).
“We estimate the primary balance is back to surplus after deficits following the crisis,” said Saliba.
While Dubai GREs have been steadily deleveraging, the real estate recovery and improved banking sector liquidity have helped the restructuring process. The Dubai Group restructuring has been finalised, Amlak has recently proposed a restructuring plan to creditors and Nakheel is in the process of prepaying bank debt.
Given the still large overall indebtedness, according to BoA Merrill Lynch, the current GRE refinancing strategy remains vulnerable if there are dislocations to global funding markets or shocks to growth. “To grow out of its debt overhang, we think Dubai needs a combination of internal cash generation, asset sales, refinancing, decent global outlook and liquidity, banking support as well as potential Abu Dhabi support,” said Saliba.
Banks are more liquid and better capitalised compared to pre 2008, and have been able to support Dubai Inc refinancing needs. The UAE Central Bank expects non-performing loans could have peaked in 2013 at 8 per cent. Credit growth to the private sector has started to pick up to levels around 10 per cent and the overall vulnerability to foreign bank funding is seen moderated, as the banking sector’s net foreign position turned positive last year.
The Dubai stock market recent sharp sell-off brought the market about 25 per cent off its May highs. The poor equity performance according to BoA Merrill Lynch is not reflective of the health of the economy. On the contrary the sell off was not matched in the credit space, as Dubai 5-year credit default swaps (cost of insuring debt) widened by just 20 basis points over mid-June levels, while sovereign bond prices held steady.
“Our equity strategy team is now turning more constructive on both the UAE and Qatar within the framework of positioning, valuations and macro catalysts,” said Saliba.
