The near-term direct impact of lower oil prices on UAE is more muted than for GCC peers. However, the indirect impact through lower regional and domestic liquidity, real estate, external sector and indebtedness would be more pronounced if oil remains low for long. In the near-term, Dubai should be able to tackle credit refinancing challenges, but the possible increase in government external borrowing needs is set to take place against a more challenging backdrop.
The UAE economy overall stands out as more diversified than the rest of its GCC peers, at first glance. The UAE fiscal and external breakeven oil prices, at US$77/bbl and US$60/bbl respectively also suggest a degree of relative comfort versus GCC peers. The non-oil sector as a share of real GDP is broadly in line with the GCC weighted average, but the oil dependency in fiscal and external accounts is lower than its peers. This has much to do with Dubai’s economy, given Abu Dhabi’s oil dependency is in fact more elevated than the GCC average.
The rebound in Dubai’s real GDP growth to a 4.5% pace since the bust has been broad-based. Construction and real estate still account for 21% of real GDP, 10ppt below the 2008 peak, and grew by 3.5%yoy in 2013. The financial sector represented 11% of GDP in 2013, with a broadly stable share. Regional petrodollar liquidity has increased the share of non-resident deposits in total deposits in the UAE banking sector from 5.3% in 1Q01 to still just 9.4% in 2Q14, with a 1.6ppt fall during the 2009 global financial crisis period. The strongest contributors to growth have been hotels and restaurants, and manufacturing, which grew by 13% and 8.7%, and accounted for 5% and 14% of GDP respectively in 2013. Wholesale and retail trade accounts for 30% of real GDP.
The global backdrop is important for Dubai with exports and re-exports accounting for 83% of Dubai’s GDP at current prices (61% of which go to Asia, 13% to Europe and 16% to MENA), but trade links suggest broad resilience. Lower domestic and regional liquidity could nevertheless weigh on tourist arrivals and the real estate sector. After contracting by 2.7% in 2009, the number of hotel guests have increased by 9% on average over 2010-13. Arabs currently represent 33.8% of total Dubai hotel guests (9.2% UAE, 17% GCC and 7.5% rest of MENA), while Asia and Europe each account for a 28% share and could be affected by depreciating currencies versus the dollar.
Although real estate supply could be better managed versus 2008, the demand side is not immune from a slowdown given an existing element of external financing, in our view. Dubai Land Department data on investment transactions suggest the bulk of transactions over1H13 were executed by foreign investors (India and UK 15% and 7.5% of total), while the domestic and Arab shares stood at 22.6% and 17% respectively. The banking sector exposure to real estate remains elevated at 23% of total loans but banks are now less reliant on foreign funding, more liquid and better capitalized. Positively, real estate related leverage has remained muted during this cycle compared to rampant private sector credit growth pre-2008. UAE-based and non-resident individuals represented 27% and 18% of banks’ sector real estate exposure (corporates: c30%; developers: c25%
Unlike GCC peers, the central government has a limited fiscal footprint while leverage has been a noteworthy lever of financing for the broader public sector. Although the Abu Dhabi fiscal breakeven oil price has remained sticky at cUS$100/bbl due in part to large foreign grants, mild recent fiscal consolidation efforts at the level of the Dubai and Abu Dhabi central government has not negatively impacted growth. In Abu Dhabi, on-budget capex represented just 11% of total GFCF in 2013, while the central government and public sector, including oil sector (20% of total GFCF), accounted for 45% of total GFCF at current prices.
The combination of increasing government borrowing needs (World Expo 2020 committed pipeline, in particular) and a less supportive global backdrop suggests potentially more challenging Dubai refinancings amid still elevated debt stock and rollover needs. The large government and public sector deposits in the banking sector (13% of total each) suggest some liquidity tightening at current oil prices. Limitless and Dubai World are in the final stages of agreeing with creditors on changing restructuring terms. Limitless is not systemic while Dubai World can repay its 2015 maturity in full. 2016 looks to be more challenging with cUS$6bn in restructured debt coming due, including at the Dubai Holding level.
