By Tom Arnold www.thenational.ae
The juggernaut growth of the boom years is slowing and the fast-changing global economic reality has triggered a reassessment of the future expansion blueprint for the Emirates.
Policymakers will have to adjust diversification targets to reflect more subdued economic activity in the coming years, say analysts.
But the silver lining to lower growth rates may be reduced vulnerability to any future global financial turbulence. The IMF yesterday upgraded its forecast for the UAE this year to 2.4 per cent from its previous expectation of 1.3 per cent growth. The new estimate is still less than half the level of GDP growth of three years ago and less than a third of 2006 levels. The IMF said the economy would rebound to a slightly faster growth of 3.2 per cent next year.
“Growth may be slower than in the past but it will also be more sustainable and real rather than in the asset bubbles built up before the crisis,” said Khatija Haque, an economist at Shuaa Capital in Dubai. The problem is many of the growth plans drawn up across the UAE were devised in the good times before the financial crisis. Senior officials already seem to accept that original ambitions may need to be revised.
Abu Dhabi is taking steps to reassess its 2030 Economic Vision, acknowledging slower economic and population growth due to the impact of the global financial crisis, a government bond prospectus revealed in August. The plan is a blueprint for diversifying the emirate’s economy away from oil. Dubai has dropped financial services and construction as its core focuses for expansion under the Dubai Strategic Plan (DSP) 2015, it emerged in a government bond prospectus released last week.
Instead, the emirate is switching its focus to sectors in which it has traditionally been strong, such as wholesale and retail, international and domestic trade, transport and storage, tourism and manufacturing. “It does not hurt to have lofty goals but revisiting those ambitions as development goals get under way is sensible,” said John Sfakianakis, the chief economist at Banque Saudi Fransi. “Tweaking makes sense but turning the whole ship around is not necessary.”
The downturn deflated a property bubble in the UAE fuelled by easy credit and high oil prices that helped accelerate economic expansion. With the property sector still largely in recovery mode and access to credit remaining tight, more burden has been shifted to other sectors of the economy. “Other sectors of the economy take up the slack and growth will recover,” said Tim Fox, the chief economist at Emirates NBD. “GDP will return to higher trend growth of 4 to 5 per cent in the next few years but may struggle to capture the growth of the old days.”
The UAE seems unlikely to catch up with the level of economic expansion displayed in the leading emerging market economies such as China and India, which benefit from bigger populations and more diversified economies.
The IMF expects China’s GDP to reach 10.5 per cent this year and 9.6 per cent next year. India will register growth of 9.7 per cent this year and 8.4 per cent next year, it said.
“Growth in the UAE will be based on oil, which is predominantly the Abu Dhabi story, and the non-oil service sector mainly in Dubai,” said Mr Sfakianakis.
Tourism forms a hugely important part of the UAE’s plans to diversify its economy and develop the non-oil sector. In Abu Dhabi and Dubai, investment is being poured into the industry though hotel development, airlines and airport development, tourism attractions and marketing of the Emirates abroad. In the capital, its flagship multibillion-dollar developments are Saadiyat Island, with planned attractions such as the Guggenheim and Louvre museums, and Yas Island, home to the Yas Marina Circuit and the Ferrari World theme park. Abu Dhabi is aiming to attract 2.3 million hotel guests a year by 2012, up from more than 1.5 million last year. As of May, Abu Dhabi had about 17,500 hotel and hotel apartment rooms compared with about 12,500 in May last year.
In Dubai and Abu Dhabi, increased airline capacity means the international airports have seen double-digit growth. For Dubai, tourism is already a key contributor to the economy, directly accounting for about 19 per cent. Dubai’s tourism has benefited this year from cheaper hotel rates and the opening of attractions such as the Burj Khalifa.
Freight cargo and logistics has traditionally been one of the UAE’s strongest industries but it could play an even greater role with a series of new infrastructure investments. Dubai and Abu Dhabi have become international centres for the sea-air cargo trade, marked by container vessels unloading cargo into ports here to be flown to the final legs of their journeys throughout the Middle East, Africa or Europe. DP World’s Jebel Ali port recently increased its capacity to be able to handle 14 million standard containers a year, and the adjoining free zone is home to first-tier multinational companies using Dubai as a logistics redistribution centre for the wider region. The opening of Al Maktoum International Airport will facilitate more cargo movements. In Abu Dhabi, Taweelah has become the site for most logistics investments, with the Khalifa Port and Industrial Zone passing the Dh10 billion (US$2.72bn) mark in investment. The port and industrial zone open in late 2012, while in Musaffah, companies such as Agility Logistics are also building up warehousing space.
After years of driving the economic growth of the UAE, property is likely to play a much smaller role in the future. A bond prospectus issued by Dubai described how financial services and construction – once core areas of focus for expansion – had been dropped from the emirate’s priorities. It is now focusing on wholesale and retail, international and domestic trade, transport and storage, tourism and manufacturing. “The global economic crisis has significantly impacted the Dubai Government’s economic development plans and, as a result, the Government is currently reassessing the stated aims of the DSP [Dubai Strategic Plan] 2015 in the area of economic development,” the document said.
Prices of property in Dubai have declined by as much as 70 per cent in some areas and several projects are stalled as developers and investors remain locked in a stand-off. Another 9,000 units are expected to come on to the market between now and the end of the year, which will result in even lower prices and rental rates.
Dealing with a persistent rise in bad loans, the UAE’s banks are still struggling to return to pre-crisis normality. Loan defaults, problems with excessive debt at Dubai Government companies and subdued appetite for lending resulted in “some stagnation” in the first half of the year, according to a report from Fitch Ratings in June. Moody’s Investors Service, another big ratings agency, echoed that point in the same month, saying recovery was still a long way off for the country’s lenders. “Overall, the operating environment remains difficult,” Moody’s said.
Analysts and investors are now watching closely how banks deal with the Dubai World debt restructuring. The government-owned conglomerate recently reached a deal with 99 per cent of its creditor banks to restructure US$24.9 billion (Dh91.45bn) of debt. The agreement is expected to cause further losses even as the banks build on more stable balance sheets than a year ago, thanks to robust support from the Central Bank.