Since the past few years, UAE’s economy had been performing exceptionally well on the back of surge in oil prices and strong growth in non-hydrocarbon sectors. In last three years (2005-08), GDP at nominal prices grew at a CAGR of 21.9%. During 2008, preliminary estimates from the Ministry of Economy indicate that the nominal GDP has grown by 27.4% to reach AED929.4bn as the region remained largely unaffected by the economic crisis during the first half of 2008 and grew at an accelerated rate supported by the surge in oil prices. The non-oil GDP too witnessed sharp growth and is expected to have grown by 23.4% during 2008.
GDP in real terms too recorded a growth of 7.4% in 2008, as indicated by preliminary estimates, to reach AED535.6bn as compared to a growth of 5.2% achieved in 2007 and 11.6% achieved in 2006. The contribution of non-oil sectors in the GDP is estimated to have grown to reach about AED577.5bn in 2008, over AED467.9bn in 2007. However, the percentage contribution has decreased to about 62.1% in 2008, compared with 64.1% in 2007.
During 2008, the gross final consumptions witnessed a sharp increase of 32.0% to AED483.9bn compared to AED366.5bn in 2007. This increase in gross final consumption has come on the back of 20.3% increase witnessed in 2007 which was backed by sharp increase in government consumption. Gross fixed capital formation jumped sharply by 76.1% to AED261.4bn against
AED148.5bn in 2007.
UAE government continued to post third consecutive budget surplus in 2007. The budget surplus in recent years was largely attributed to better oil & gas earnings backed by high oil prices. During 2007, total government revenue increased by 13.7% to AED228.8bn as compared to AED201.2bn in 2006. The rise in revenue was mainly driven by oil & gas exports earnings and other non tax revenue during the years. For 2008, we believe UAE would have again recorded a high fiscal surplus which is estimated to be in the range of 10-15% of the country’s gross domestic product as oil prices remained high for major part of the year.
During 2008, as per preliminary estimates total exports of goods and services increased to AED746.7bn. Crude oil constituted 36.2% of commodity exports structure in 2008, whereby re-export comprised 38.8%, free zones exports 11.2%, oil by products 2.5%, gas 4.5% and other exports 6.8%. On the other side, total imports of goods and services increased to AED562.6bn in 2008. As such, trade surplus amounted to AED184.1bn in 2008. Higher weighted average oil prices in 2008, increasing non-oil exports, free zone exports, moderation in commodities prices globally etc. would boost the current account in 2008. However, rising level of debit balance of services is the key concerns which may reduce the growth in current account balance.
During the first nine months of 2008, the money supply as measured by M1 grew by 29.5% to AED235.3bn compared to AED181.7bn at the end of December 2007. The rise in M1 was mainly attributed to spurt growth in monetary deposits which increased by 28.7% to reach AED200.4bn compared to AED155.7bn at the end of December 2007. Sharp cuts in repo rate at a time of surging liquidity in the economy resulted into steep decline in deposit rates in thecountry. The three month AED deposit rate has witnessed declined from 4.34% in Q1-2007 to 1.82% in Q3-2008.
As per IMF estimates, inflation in UAE stood at 12.7% in 2008. We expect that the inflation is likely to come down significantly in 2009 and may stand in the range of 4%-6%. The slump in property prices particularly in Dubai and falling rentals coupled with lower food prices, a shrinking population and slower money supply growth due to reduced oil liquidity will all weigh on inflation rates during the year.
Over the past decade, the population in UAE grew at a CAGR of 6.3% which is one of the highest in the world. During 2008, the population in UAE grew by 4.7% to 4.7mn compared to 4.5mn in 2007. The high growth in the recent time was largely attributed to the continuous influx of expatriates with higher employment opportunities. Of late, a large number of laborers have lost their jobs during 3Q-08 and 1Q-04 as many projects have either been shelved or postponed and redundancies have spread to professionals in the real estate, hospitality and financial sectors. With most visas for foreign workers tied to employment, those that lose their jobs often have only a few weeks in which to find new employment before being forced to leave the country. As such there is all likelihood of a drop in UAE population for 2009.
The Banking sector in UAE until recently had been growing significantly mainly as a result of relatively low interest rate environment, high oil prices and a flourishing economy. With high GDP growth rates achieved in the recent past and surge in oil prices, the sector had been growing over 30% year on year in the past five years. At the end of 2008, the total assets of UAE banks stood at AED1,480.5bn, the largest among the GCC countries. The sector comprised of 24 national banks and 28 foreign banks having aggregate branch network of 638. The presence of 52 banks to serve a population of 4.7mn is relatively high which makes UAE one of the highest penetrated banking countries in the world.
Over the last decade, UAE has witnessed sharp growth in infrastructure development and created world class infrastructure in the country. Oil boom in the recent time has led to an increase in government spending on infrastructure development in UAE. These developments are particularly evident in the larger emirates of Abu Dhabi and Dubai. However, governments in the northern emirates are rapidly following suit, providing major incentives for developers of residential and commercial property. Considering the tight liquidity, spending on infrastructure is coming from the public sector which remains buoyant on the back of economic stimulus packages, which have been strengthened by government surpluses accumulated during the period of high oil prices. The federal government in its budget for 2009, late last year allocated US$11.5bn, a 24% increase in infrastructure spending versus 2008.
It is expected the property market to witness further correction in 2009. However, the prices of projects towards completion are not expected to witness sharp drops as those seen in offplan sales. Also, the trends will be different across the Emirates. Unlike Dubai, the property market in Abu Dhabi and other emirates seems to be more resilient to the downturn. In Dubai, we expect to see further price correction for freehold properties in the range of 15% to 30% in 2009. We expect further correction in office rents in the range of 10% to 25% as businesses downsize and hold their expansion plans. In Abu Dhabi, we expect the residential market to stabilize with the new supply coming from mega projects such as Al Reem Island and Al Raha beach in 2009.
Manufacturing sector in UAE is the largest segment of nonhydrocarbon sectors and a significant growth driver of non oil economic growth. After the hydrocarbon sector, the manufacturing sector is the biggest contributor to the GDP with a share of 12.9% in 2007 and an estimated share of 12.2% in 2008. Since past few years, UAE is investing heavily in its manufacturing sector, stimulated by the need to diversify the economy. The manufacturing sector is performing well and growing at double digit rate. Manufacturing sector is crucial for future prospects of the UAE economy. Favourable economic environment, government’s various initiatives, emergence of free trade zones, etc. would be driving force for UAE’s manufacturing sector in years to come.
The year 2008 was a difficult year for the financial market led by the financial turmoil in USA and other developed economies and its effects on the other parts of the world. 2008 was also tough year for GCC region. Though during the first half, the GCC markets performed well on expectations that the markets would remain relatively immune from the financial crisis because of their limited exposure to sub-prime and/or related instruments, but things deteriorated due to global impact of financial turmoil. Among the GCC markets, UAE market declined the most in 2008. The National Bank of Abu Dhabi’s (NBAD) UAE general index witnessed sharp decline of 56.6% in 2008 over 2007.
Compared to 2007 performance, corporate earnings came down in 2008. If we look at 2008 numbers alone the aggregated profits of companies listed on both ADX and DFM show a marginal decline of 4.7% with ADX listed companies showing a growth of 10.0% while the profitability of DFM listed coming down by 24.6%. The real impact on corporate profitability was witnessed in 4Q-08 with massive write downs by most companies due to their exposures to real estate markets and investments. The profitability of ADX based companies in the fourth quarter of 2008 came down to AED2.7bn, a decline of 73.0% from AED10.0bn achieved in the corresponding quarter of 2007 while that of DFM based companies the profits of AED7.2bn achieved in 4Q-07 culminated into losses of AED4.7bn.
The economic outlook for 2009 looks grim as low oil prices, stricter lending requirements by banks and greater caution among investors who have lost by the collapse in real estate prices translate into a significant number of projects either being postponed or shelved completely. Government spending will limit the downside and help reduce the job losses in key sectors, but will not be sufficient to fully counteract the contraction in trade volumes, the slowing of consumer spending on the back of population losses, and the severe cutting back of investment plans making us believe that the economy will likely post its first contraction in real GDP that would be in the range of 0.5-1.0% for 2009 with more of a downside risk.
