While the first quarter of 2011 may have seen some economies in the Middle East and North Africa (Mena) cowed by incessant protests, the United Arab Emirates appeared to have shielded itself from serious economic fallout, says Bank of America-Merrill Lynch (MofA-ML).
In actual fact, the ongoing geopolitical tension in the Mena region has even propped UAE’s economy as oil prices, which have skyrocketed by a whopping 47.4 per cent to above $124 per barrel as of April 26 from $84.2 year on year, beefed up its fiscal fund.
“The UAE continues to be immune to the regional civil unrest. Growth is recovering gradually on high oil prices and a robust external sector, though the real estate market continues to be a drag on growth,” the bank said in a report published early this month.
BofA-ML also acknowledged that
Dubai Inc, a conglomerate of businesses associated with the government of Dubai, has been making smooth progress with its multi-billion-dollar debt restructuring plan.
The bank expects UAE’s economy to grow 2.8 per cent this year and 3.5 per cent in 2012, spurred by Dubai’s buoyant tourism industry and healthy re-export activities, as well as Abu Dhabi’s on-going infrastructure spending.
The
International Monetary Fund (IMF) in a report published early this month, mentioned that they are projecting UAE’s real gross domestic product (GDP) to accelerate to 3.3 per cent in 2011 and 3.8 per cent in 2012 despite the Mena outcry.
BofA-ML, however, cautioned that the unstable political situation across the Mena region and the property glut in Dubai will continue to pose a possible threat to future growth expectations.
Caution remains as near-term risks exist
After violent protests broke out in neighbouring
Bahrain in February, capital flows were diverted to the UAE. However the Emirates and the rest of the GCC region would have to brace for a rough economic ride should Bahrain’s political crisis escalates.
“[The] Bahrain standoff could increase regional geopolitical risks,” the bank said. Aside from this, other major risks that the UAE has to be wary of include “a prolonged drop in oil prices, a deteriorated G3 outlook, unpleasant surprises in Dubai Inc restructuring and hampered market access to external finance.”
Also importantly, the property oversupply is anticipated to continue to haunt UAE’s attempts to move further in its economic recovery plans.
According to
Jones Lang LaSalle (JLL), total office stocks in Dubai in the first quarter of 2011 stood at approximately 60.2 million square feet (sq ft), up by over eight per cent from the 55.6m-square-foot office space in the fourth quarter of 2010.
The entry of new supplies was also observed in the residential property sector following the delivery of 7,900 units in Q1, bringing the total home stocks to 317,000 units. JLL noted that some 20,700 units will likely be delivered in the coming quarters.
Recovery still fragile
Taking these factors into account, BofA-ML anticipates UAE’s recovery to be fragile despite the presence of positive economic fundamentals in the early months of 2011.
“Credit to the private sector remains unsurprisingly weak and the total loan book of the banking sector contracted by five per cent, year on year, in February. While deleveraging strains have eased, they have still not yet dissipated in our view and the recovery remains fragile,” says the report.
Meanwhile IMF, in its regional economic outlook survey for the Middle East published on Wednesday, says growth forecast for oil exporting countries in the Mena, which include the UAE, will likely grow by 4.9 per cent this year. The figure was over 100 per cent more than the 2.3 per cent projection for oil importing countries in the region.
While rising oil prices may offer economic comfort to oil exporters, IMF says these countries “continue to face challenging structural issues such as the need for greater diversification of their economies, job creation for their population, further financial development to support economic growth, and improvements in the management of public resources.”
And with oil prices spiking oil exporters would have to further deal with high import bill, estimated to reach an average of about $15 billion this year, resulting to either higher inflation or worsened fiscal balance.
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