UAE economy to grow 3pct in 2011: Saxo Bank

The United Arab Emirates is expected to post a GDP growth of three per cent this year with inflation hovering at a similar rate as housing and food prices remain under pressure, according to Copenhagen-based Saxo Bank.

The investment bank’s projection has not been far from the International Monetary Fund’s outlook of an estimated 3.2 per cent economic growth for the UAE in 2011, slightly higher than the 2.4 per cent forecast for 2010.

David Karsbøl, chief economist of Saxo Bank, said food prices and house rents – both play major parts in the country’s consumer price index – will likely add to the country’s inflationary strain this year.

“Food prices have gone much higher and rents have been under pressure the past years and we expect that [trend] to continue through 2011. They will roughly balance out and we expect the net effect will be an inflation of about three per cent,” Karsbøl said in an interview with Alrroya.com.

Because of their arid land, the UAE and its neighbouring countries in the Gulf have been heavily reliant on imported food supplies, making them vulnerable to upticks in global food prices. Recent factors such as extreme weather patterns resulting to droughts and floods (El Niño and La Niña phenomena), oil price hikes and soaring demand for biofuels have forced food costs to catapult.

In a recent report, the United Nations’ Food and Agriculture Organisation said worldwide food prices hit a record-high in January, even beating the peak rate posted in the Food Price Index during the food crisis of 2007-2008.

UAE investor confidence to return

Karsbøl said other countries in the GCC are expected to experience the same economic trends that will be noticeable in the UAE this year. For instance, the financial sector will continue to bear the brunt of being overexposed to a sluggish property market and a significant amount of bad loans.

Households, some of which probably indebted as well, would have to see their disposable income shrinking as they prioritise paying off their obligations, Karsbøl added.

“The financial sector needs to rebuild capital and regain not only solvency, but also a good comfort zone that will allow them to be more risk-willing. They can only do so, however, if the receivers of the loans themselves (the borrowers) are credit worthy. In this case, the private sector has to pay off debt, be cautious and conservative in order to create an environment where the banks can work as normal,” he explained.

In the short-term, however, Karsbøl also sees investor sentiment in the UAE gradually gathering steam, especially following recent developments with the debt restructuring plan at Dubai World and other Dubai-government-linked conglomerates.

GCC single currency needs rethinking, oil to be $100

While it remains uncertain whether Saudi Arabia, Kuwait, Bahrain and Qatar will push forward with their plan to launch a single currency, Karsbøl said the GCC member-states will have to seriously consider the lessons learned from the European Union’s recent fiscal issues.

Since news of a Gulf monetary union first came out in 2005, the council has been hit by a series of roadblocks ranging from the global financial crisis to neighbouring states UAE and Oman’s withdrawal from the project. In 2009, the monetary union abandoned plans to introduce the currency in 2010 and until now, no official confirmation has been released as to the money’s exact launch date.

According to Euromonitor International, it is unlikely for the Gulf currency to be active before 2012, while some analysts reportedly expect 2015 to be the most ideal time.

Karsbøl, however, believes that if the four remaining GCC countries push the plan forward, the union should impose very strict rules such as the amount of budget deficits that any member countries can have.

“I think that while they are situated in the same geographical area, the countries involved in the GCC currency have completely different economic situations. If they do decide to move on with this project, they should definitely learn from the European experience, especially with regard to the creation of a stability peg stipulating what members can and cannot do in relation to fiscal situation and budget deficit,” he said.

Meanwhile, Karsbøl said oil prices – which have already been under strain because of the recent political turmoil in Egypt – will likely settle at the $100-per-barrel (Dh365)mark by the middle of 2011. On February 3, Brent Crude contracts traded at an intra-day high of $103.37, its highest level since September 2008 amid fears that the Egypt chaos will affect neighbouring Middle East countries.

Karsbøl added that oil prices are expected to retreat to $80 a barrel towards the end of the year as the US dollar gathers strength.