UAE is back on track... and growing fast

After suffering from a downturn in 2009 because of the global fiscal crisis and regional debt default problems, the UAE economy is back on track and recovery could more than offset the decline during that year. The two main emirates of Abu Dhabi and Dubai are projected to spearhead growth, thanks to strong oil prices, restructuring, high public spending and other factors.

One of the key factors that will spur growth probably next year is an expected turnaround in the construction and real estate sector that was one of the main victims of the 2008 global fiscal crisis and ensuing turbulence.

In 2010, the UAE’s real GDP swelled by around 3.2 per cent, according to IMF estimates, while it could grow further by 3.3 per cent this year and 3.7 per cent in 2012. Projections by another establishment, the Institute for International Finance show the UAE GDP will grow by 4.4 per cent in 2011 and 3.1 per cent in 2012.

IIF forecast growth in Abu Dhabi at around 3.8 per cent in 2011 and 3.7 per cent in 2012 and that in Dubai at 3.1 per cent and 2.8 per cent in the same period.

“We expect growth in the UAE to accelerate in 2011 on the back of rising oil production. Most indicators of economic activity have registered a significant rise in real terms in the first three quarters of this year,” IIF said.

In Abu Dhabi, non-hydrocarbon growth will be supported by high public spending on infrastructure, including through government-related entities (GREs), it said.
“The solid growth in Dubai’s core activities of trade, retail sales, and tourism will more than offset the continued retrenchment in the construction and real estate sectors, resulting in growth of 3.1 per cent.”

It noted that Dubai has returned to international capital markets following Dubai World’s restructuring agreement with its creditors in September 2010. “The agreement between DW and its creditors is expected to improve the outlook of Dubai’s economy, but it does not remove all uncertainties,” it said.

“Backed by UAE federal resources and having successfully restructured a large portion of its debt, Dubai’s financial position has improved markedly.”
Citing government data, the report showed the share of construction and the real estate sector in Dubai’s GDP declined from 30% in 2007 to 23% in 2010.
Non-hydrocarbon growth is projected to remain around 3% in 2012 despite a more difficult external environment.

“The real estate market in the UAE appears to have bottomed out, and significant progress has been made in corporate restructuring and in governance. The main catalyst of the projected solid growth next year is the expected turnaround in the real estate market,” the Washington-based IIF said.

“Progress in structural reforms over the next few years (mostly in the legal and regulatory environment), the strengthening of federal institutions, and the enhancement of transparency and governance in the corporate sector could accelerate the pace of economic growth to over 4% in the medium term.”

The UAE has the second largest Arab economy after Saudi Arabia in both real terms and current prices. Growth boosted the size of its real GDP to $301 billion in 2010 and the value is projected to swell to around $363.8 billion in 2011 and nearly $384.2 billion in 2012, according to the IMF.

In 2010, IMF figures showed the UAE’s economy accounted for nearly 15 per cent of the total Arab GDP although its population did not exceed two per cent of the region’s total population. Given its large economy and relatively low population, the UAE controlled the second highest per capita income in the Middle East after Qatar and one of the highest in the world.

“You can say that the UAE has almost fully recovered from the repercussions of the crisis and I don’t think it will be largely impacted by the current EU debt crisis as its financial institutions are with little exposure to the EU,” said Mohammed Al Asumi, a well-known Gulf economist based in the UAE. “Another factor is the country’s large oil resources, solid non-oil sector and substantial assets.”

IIF estimates showed the UAE’s foreign assets stood at around $550 billion at the end of 2010 and they could soar to a record high of nearly $600 billion at the end of 2011 because of high crude prices.

The assets, controlled mostly by the Abu Dhabi Investment Authority (ADIA), have already climbed close to $600 billion and could reach that level at the end of next year. The rise means the UAE will maintain its position as having the largest foreign assets in the region thanks to high oil prices and output as well as improvement in global markets through 2010 and the first half of 2011.

The massive funds, built up through petrodollar savings over the past four decades, will allow the UAE to finance fiscal deficits for many years in case crude prices dipped below the breakeven price for the country’s budget.

“We project total gross foreign assets of the UAE to continue rising to about $600 million by end-2012. This would result in an overall net external asset position of about $480 billion, equivalent to 130 per cent of 2012 projected GDP,” IIF said.

“Such large financial resources will be more than adequate to finance likely fiscal deficits for several years if oil prices fall below $85/b (which is the estimated breakeven price of oil that balances the consolidated 2011 budget for the UAE).”

Besides growth, the surge in crude prices will allow the UAE to return to fiscal surplus this year after suffering from a deficit of around 1.4 per cent of GDP in 2010 because of lower oil prices and high public expenditure. The surplus is forecast to be around 5.6 per cent in 2011 and 2.1 per cent in 2012.

The current account balance is also expected to widen from around eight per cent in 2010 to 13.1 per cent in 2011 before slipping to 11.3 per cent in 2012.

UAE banks, which control the largest asset base in the Arab region, are also recovering from two previous difficult years and making higher earnings despite slow domestic credit and large bad loan provisions.

The balance sheets of 15 national banks in the country showed their net earnings leaped by around 26 per cent to Dh16.5 billion in the first nine months of 2011 from Dh13.1 billion in the first nine months of 2011. Analysts expected a 10-20 per cent growth in their combined net income through 2011.

The surge in their assets and capital over the past three years allowed the UAE to control the largest banking sector in the Middle East while Dubai-based Emirates NBD became the largest bank in the region following the merger of the National Bank of Dubai and Emirates Bank International.

At the end of the first half of 2011, the UAE controlled just over 18 per cent of the combined assets of the nearly 470 banks grouped in the Union of Arab Banks (UAB) and around 28 per cent of their capital.

The consolidated assets of the UAE’s 23 national banks and 28 foreign units totalled around $464 billion at the end of June, up from nearly $437 billion at the end of 2010 and about $413 billion at the end of 2009.

The assets at the end of June accounted for nearly 18.2 per cent of the combined Arab banks’ assets of nearly $2.463 trillion, UAB data showed.

The UAE banks’ shareholders equity, covering capital and reserves, stood at round $73.2 billion at the end of June, nearly 28 per cent of the total Arab banks’ shareholders equity of around $260 billion.

The UAE also controlled the largest deposit and credit base, standing at around $306 billon and $285 billion respectively, the report showed.
A breakdown showed the ENBD retained its position as the largest Arab bank by assets and capital for the fourth year running.

At the end of 2010, ENBD controlled nearly $77.98 billion in assets, the largest in the Arab world. It also had the largest shareholders equity, standing at nearly $9.19 billion while topped in terms of loans, which totalled about $53.7 billion.

“Statistics from the banking sectors in the Arab world showed that ENBD was ahead of all regional banks in terms of assets for the fourth successive year,” UAB said in its recent monthly bulletin.

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