Onward and upward for the UAE economy

The future is in our hands but don't yawn. It's not a political platitude or corporate mission statement, but an unavoidable (if deceptive) reality when you have a report dated two months ahead, one which has now reached the public domain. Even if it is only economic research.

Moreover, when the contents are loaded with forecasts, you have to extend further admiration for the authors and their chutzpah. Forecasting economic data is difficult enough, without post-dating the publication. Predicting the past tends to be easier, oxymorons aside.

Business Monitor International's latest regular outlook for the UAE is already set in the first quarter of 2007. Hats off for an early showing. Now to the nitty-gritty of the numbers, which, as five-year projections, take us out to 2011 groundbreaking stuff, none of this 2010 feebleness.

A glance at the graphics helps tell the tale.

Whereas GDP growth is expected to repeat in 2007 its 8 per cent outturn of this year, a moderate cyclical retreat is posted to 4.5 per cent in 2009, with pickup thereafter. National income, measured as nominal GDP, consequently rises steadily from $151 billion this year to $237 billion by 2011.

With population increasing quickly, however, reaching 6.9 million the same year, GDP per capita will tend to level off in the region of $34,000, which globally remains impressive. Nothing said about income distribution there.

As oil prices also ease back towards $40 a barrel historically still high oil exports are set to subside, but hold a plateau above $40 billion against the background of gently rising volumes.

BMI presents a positive prognosis. The UAE is "charting a steady course ... with a mixture of hydrocarbons muscle and robust non-oil performance". Indeed, like China, it has become "rampant".

That bullishness relates to a broad-based effort, not depending solely on oil windfall. Exports are rising across a range of sectors, with "growing manufacturing and re-export prowess".

Non-oil sources

It's expected to continue. Despite rising imports based on strong domestic demand, those non-oil sources will offset a decline in energy receipts.

The broader balance of payments looks even better, bolstered by incoming investment. BMI says the UAE is "likely to emerge as one of the region's strongest locations for FDI", with levels rising through $20 billion in 2007, propelled particularly by opportunities in real estate.

As far as consumption is concerned, high government spending of course is another supportive factor for economic growth, which does hark back to the hydrocarbon treasure-chest. The recent downturn in equities, however, "will clearly play a role in dampening retail spending growth" for a while.

Reasons to be cheerful appear to run deeper though, as ongoing reform of the regulatory climate backs the buoyant FDI scenario. BMI considers the economy "relatively well insulated" from external shocks, capable of riding out the stock price correction.

Reform is being seen, too, in the obscure area of government finances, where the currently "flush revenue situation" has not prevented the outsourcing of non-core activities, with Abu Dhabi planning a 40 per cent reduction in the public wage bill.

Still, the federal government is due to spend heavily on infrastructure and public services, with development outlays to show "pronounced increases" in health and education.

Fiscal policy is meant to be undergoing thorough overhaul for better coordination between the emirates and to improve data quality, with a performance-oriented budget law promised, which will aid planning.

Yet, the "tendency to engage in off-budget spending means the true picture remains elusive". Analysis is confused also by the difficulty in distinguishing large, private investment groups from public entities. "Dubai's finances remain particularly opaque", BMI claims.

That perplexity transmits itself to interpretation of the budgetary accounts, where BMI chooses to specify a consolidated budget (of Abu Dhabi, Dubai, Sharjah and federal accounts) in positive balance for 2006-07, but dropping to around zero in later years, with "prudent management required" as oil prices slip.

Project activity

Construction, meanwhile, will continue apace. Over the medium term assumed to be five years Dubai is said to be on course to spend some $200 billion on project activity, with Abu Dhabi now catching up with $160 billion.

Which leads to the burning issue of inflation, where BMI's take is twofold.

On the one hand, it notes that the "hothouse" of Dubai has suffered with rental hikes averaging "an unsustainable 40 per cent" in the past two years.

The effect is not isolated, with "contagion spreading to other parts of the economy" as firms are forced to pass on higher costs incurred in respect of commercial premises.

On the other hand, BMI chooses to steer clear of the quagmire of measuring real inflation, opting instead to anticipate the path of the official series, offering 5.5 per cent for 2006 and 4 per cent next year, subsiding to 3 per cent at the turn of the decade.

Additional housing stock will play its part, with substantial new residential provision indeed promising a chance of oversupply, and a "concomitant downward movement in rental prices". To be welcomed by many.

Like others, BMI has suggested a shift of inflation from Dubai to Abu Dhabi, although the capital city seems now to be pre-empting that event by proposing a seven per cent rent cap.

On the issue of whether monetary union might be hastened to help manage the Gulf's soaring performance, BMI keeps faith with the GCC's commitment to the single currency. No adjustment is mentioned to the dollar peg in 2010, for instance.

Which leads us to suppose that the authorities are presumed to find other ways of managing, as is the case now.

All in all, a nice story. Shame about the incredible inflation series. But then: shame about inflation. Who knows how that might induce turbulence, and a wobble at least in the soaring balloon?

We live in a world where low interest rates have prevailed for a very long time, and the pursuit of real assets, especially property, has reacted accordingly. Governments in all directions are now very concerned that that bubble should not be pricked.

Whether it's a sustainable flightpath should be a matter of growing conjecture.