The local economy appears set to sustain its recent upward momentum, as investor confidence returns and some core sectors rebound. However, there are still concerns that weak performance of key trading partners and tight liquidity could hold back expansion.
On September 11, the Central Bank of the UAE suggested GDP growth was likely to exceed the levels projected by the IMF earlier this year. “As regards the prospects for 2012, the UAE economy may achieve better results than the IMF estimate of 3.5% growth,” the bank said in a statement.
However, the central bank then singled out Dubai, stating that the emirate could achieve growth of 4% or more this year, as its economy has rebounded strongly from the effects of the global economic crisis.
The reserve’s position is backed by solid signs of regeneration and new growth. Real estate, once the flag bearer for Dubai’s sustained economic growth, but dramatically impacted by the downturn, is once again on the move. The fall in residential prices, which saw values in some segments drop by as much as 60%, appears to have ended, with prices either remaining steady or making modest gains. Bucking this trend are villas, which have seen prices spike by 21% so far in 2012, local media has reported. The cost of buying an apartment has climbed by an average of 4.9% this year, while rents have risen by 6.8%.
Most analysts predict it will be some time before the losses of the past few years are regenerated, though it seems that buyer interest is on the rise, with the value of property transactions in the second quarter totalling $11.4bn, almost double that of the first three months of 2012, according to the Gulf Times.
While Dubai still has to deal with the fallout from the global financial crisis, the steady recovery of the economy is building confidence in the markets over the emirate’s ability to meet its obligations. On September 17, Dubai’s credit default swaps, which represent the cost of insuring against default, stood at 278 basis points, down to pre-crisis levels of September 2008, a clear indication that investors and ratings agencies have more confidence in Dubai’s ability to manage its high levels of debt.
Though Dubai’s economy is regaining momentum, many feel that it could be doing better but for regulatory restrictions and difficulty in accessing capital. Bank lending increased by only 1.8% in the first six months of 2012, compared to the 7% in Saudi Arabia and almost 14% in Qatar. Shehab Gargash, the CEO of Daman Investments, said the emirate should be performing better, announcing on September 11 that his firm was holding off on a planned initial public offering due to a lack of liquidity in the market.
“The market is not ready yet; the liquidity in the market is not enough for an active primary market and it will not be there for another two to three years,” Gargash told reporters at a press conference. “In a market such as Dubai’s, which has sound macroeconomics, liquidity is the one handbrake that will make the difference between a speedy recovery or not.”
Another concern for the emirate will be the ongoing debt crisis in the eurozone, one of its major export markets, which accounts for just under one-third of shipments. According to data issued on September 9, the value of the emirate’s shipments to Italy, Spain and Greece fell by around 25% in the first half of this year. Though total exports to EU member states did show growth, up by $136m to $1bn for the opening half of the year, with sales to Poland, Slovakia, Bulgaria, Lithuania and Estonia all up, a further deterioration of economic conditions in the bloc will impact Dubai.
“Dubai is a small, open trade-reliant economy and weak activity in the eurozone will hit the performance of its exports and the re-exports it services through its ports,” Simon Williams, the chief economist for the Middle East and North Africa (MENA) region at HSBC, told The National on September 10. “Dubai is an export-orientated economy for goods it produces and re-exports; if global growth weakens, it will have an impact on the economy.”
Though the emirate will seek to make up any slack in exports to Europe should trade with the region slide as a result of the Continental debt crisis via increased sales to other markets, particularly in the MENA region and Asia, indications are that these economies are also slowing, which could also impact the local economy.