Highlights
-Economic growth to slow to 2.4 percent in 2009
-Inflation to drop to 7.1 percent in 2009 from 12.2 percent in 2008
-GDP growth to slow to 2.4 percent in 2009, but likely increase to 5.3 percent in 2010
Economic growth in the United Arab Emirates (UAE) slowed in the past two quarters due to declining oil prices and contagion from the global economic crisis. With oil prices promising to remain low in the near-term, the UAE’s national budget will need to be trimmed to accommodate for a significant drop in its 2009 gross domestic product. Private businesses will also be forced to sideline large-scale projects and the construction sector is slated to layoff thousands of workers in the coming months.
Nonetheless, economists predict the UAE will maintain a steady, but significantly reduced, growth rate in 2009. The country will be supported by a rise in non-oil exports, declining inflation, and the Emirate’s employment of its large 2008 budget surplus to create liquidity in its financial markets.
Economic Slowdown
On January 22, 2009, Standard Chartered’s 2009-2010 UAE economic forecast predicted the emirate’s economy will achieve 0.5 percent growth in 2009, compared to 5.2 percent in 2008. The Global Investment House (GIH) predicted a lower decline in growth, projecting 2.4 percent growth in 2009. Citigroup echoed GIH’s projection estimating 2.7 percent growth in 2009 but expecting growth to accelerate to 5.3 percent in 2010. UAE markets dipped significantly in the fourth quarter of 2008, with Abu Dhabi’s primary index ending 2.91 percent lower at 2,315 points and Dubai’s benchmark closing 0.36 percent down at 1,637 points. The UAE’s financial and real estate sectors were hit the hardest with National Bank of Abu Dhabi and First Gulf Bank dropping 9.32 and 5.94 percent respectively and Union Properties falling 4.23 percent.
The value of UAE real estate contracts declined 40 percent in the fourth quarter of 2008. The drop in real estate development is resulting in job cuts, particularly among the UAE’s large migrant worker population. For example, UAE developer Nakheel cut 500 jobs in December 2008. All told, the declining UAE job market is resulting in the cancelation of 1,500 to 2,000 visas a day.
Saving Graces
The impetus behind Standard Chartered and GIH’s positive outlook for the UAE in 2009 and 2010 are the emirate’s large budget surplus from 2007 and 2008, declining inflation rates and rise in non-oil exports. In 2008, the UAE recorded a 28 percent budget surplus. This budget surplus is being utilized to fund national infrastructure projects in 2009, including investment in small and medium enterprises and the construction of 26,000 new houses. The UAE Central Bank is also supporting market liquidity in the midst of declining investment by cutting bank repurchase rates by 50 basis points, as well as to guarantee all domestic and foreign bank deposits in the Emirates.
Inflation in the UAE is projected to decline to 7.1 percent in 2009 from 12.2 percent in 2008. The decline in inflation is a direct result of the drop in gross domestic income and is supported by anti-inflationary policies, like the institution of a 5 percent rent cap. The decreased inflation rate will benefit cash-strapped UAE residents adjust to slower economic growth.
Outlook: Positive Growth
Overall, the UAE’s economic outlook is positive. The fact that the country is experiencing a rise in non-oil exports (up 24 percent in 2008 to $29.02 billion) is a good sign that the UAE economy is increasingly diversified. Though the national budget may go into a deficit by the end of 2009, the government’s investment in national infrastructure projects and the financial sector will pay off in 2010. With the banking industry nearing recovery and Emaar Properties reporting growth in the fourth quarter of 2008, 2009 will prove to be a stable year for UAE investors.
