Economic Update

For Dubai, 2011 was a year of consolidation, with solid growth for many key economic sectors, the debt load of some of the emirate’s leading corporations sharply reduced and confidence growing apace, though concerns linger over how renewed economic slowdown elsewhere will impact the emirate.

Though year-end figures have yet to be released, Dubai’s economy is expected to have posted growth of 4% or more for 2011, according to a recent report by the Saudi American Bank Group, mainly on the back of a strong performances by the trade and services sectors.

Over the past 12 months, leading corporate bodies, such as Dubai World, restructured their debts and worked towards trading their way out of difficulties lingering from the real estate market’s plunge in 2009. Though still carrying a debt burden (some estimates put the amount to be repaid in 2012 at more than $14bn), analysts believe the majority of this load will be met through internal cash resources and refinancing bonds held by local banks.

Though it has further diversified and strengthened its economy by rationalising investments, Dubai is still susceptible to any global downturn, as was the case in 2008 and 2009. With the financial, tourism and trade sectors among the emirate’s leading GDP contributors, a renewed bout of recession in Europe and elsewhere would undoubtedly have an impact on the local economy, though a greater resilience developed in recent years should help Dubai ride out any storms.

Indeed, despite the concerns over the global economy, Dubai appears to be looking at the New Year with confidence, with the government set to step up investments aimed at bolstering growth. Under the 2012 budget, approved by Sheikh Mohammed bin Rashid Al Maktoum in late December, 41% of all state expenditures will be directed towards infrastructure, transportation and economic development projects, with a further 29% to be spent on health care, education, housing and culture.

Importantly, the budget also foresees a sharp reduction in the deficit for 2012, with the revenue shortfall projected at just under $500m, more than 50% less than in the past year. Total expenditures for 2012 have been set at $8.79bn, while income is expected to come in at $8.29bn. This strong turn around from the higher deficits of the past few years since the 2008 global economic crisis should further restore investor sentiment and encourage growth.

The cause of recovery will be aided by the low inflation levels going into 2012. As of the end of November, consumer inflation was running at just 0.2%, having remained at below 1% for almost all of 2011. With the emirate’s property market still subdued (though showing signs of greater activity in the latter half of 2011), pressure on rental costs continued to be low, taking a main factor out of the inflationary equation. With the costs of food, fuel and property all expected to remain flat during 2012, there is little to suggest Dubai’s inflation rates will markedly increase in the New Year.

Though a looming prospect of recession in some parts of the world may well impact the global travel and tourism industry, Dubai has yet to feel the effect of any slow down. At the end of December, figures were released showing that passenger numbers at Dubai International Airport jumped by 8.9% in the preceding month compared to November 2010, with more than 4.4m travellers using the facility. The November figure took the 2011 traffic total for the airport to almost 46.3m. A strong showing was expected in December, one that would take numbers well over the 50m mark.

The upsurge in passenger traffic at Dubai International appears to have an effect across the emirate’s tourism industry. According to data released by TRI Hospitality Consulting in mid-December, occupancy rates at Dubai’s hotels have returned to the boom levels of 2007, prior to the financial crisis. Dubai’s occupancy rates hit 87.3% in October, with revenue per room jumping 13%. The strong growth was attributed to an increase in tourist and business travel activity, as well as a flow-on effect of the Arab Spring, with many travellers looking for an alternate destination for work or pleasure amidst unrest elsewhere in the Middle East.

While the debt burden of some state-backed enterprises is still significant, it is far more manageable than it was less than a year ago. With the economy starting to regain some of the vitality of pre-crisis times, 2012 could turn out to be a year of moderate expansion, not just consolidation.