With stock indexes hitting record levels in the Emirates this week, anyone taking a quick temperature-check on the UAE economy would likely conclude that the boom times were set to stay. Yet a significant new report this week suggests that it may be time to look at some deeper trends, as the UAE might be moving towards a more mature market status.
On Wednesday, the UAE's indexes had a particularly robust day. The national benchmark NBAD General Index closed 171.7 points up at 19,146.83 points, while the DFM index closed at a new record high of 1267.3 points, up 1% on Tuesday's close.
Banking and insurance led the charge, with shares in the National Bank of Abu Dhabi (NBAD), the Union National Bank and National Bank of Dubai in big demand. Leading Abu Dhabi-listed insurance shares such as Abu Dhabi National Insurance, al-Ain Ahila and Emirates Insurance also showed more than 2% gains.
Not bad, and not so unexpected either, as the Gulf in general continues to experience a protracted bull run, and bourses from Kuwait to Oman keep rocketing.
Yet this week also saw the release of a report by leading regional investment bank EFG Hermes which concluded that the UAE is now undergoing a fundamental shift in its economic status.
"The UAE economy has rapidly evolved from a youthful economy to one that is now showing signs of maturity," said Hany Genena, EFG-Hermes senior economist and author of the report.
The evidence for this, EFG-Hermes says, is all around. Oil production is currently running close to full capacity, while the loan-to-stable resources ratio in the banking system is approaching its statutory limits. At the same time, housing rents are becoming comparable with those in Europe and the US, while equity prices have more than kept pace with rises in net earnings.
The UAE is therefore set to move - even if gradually - from a phase characterised by spare capacity and accelerating economic growth to a phase of capacity constraints and steady-state growth.
Oil and gas are of course the two main resources on which the rest is largely built. In 2004, real GDP growth rate fell from 2003's 11.9%, converging down to 7.4%, due, the report says, to diminishing marginal growth in crude oil production.
With the Emirates currently producing at close to full capacity, de-bottlenecking is a major business, and given that increased capacity will not come onstream until 2006, the report said the marginal impact of higher crude production on real GDP growth would be tiny over the next 12 months - and probably for even longer, if capacity additions do not coincide with the current oil cycle.
The bullish stock markets are, however, a sign of major investor confidence, as is rising demand for the dirham and the negligible spread between dirham-denominated deposits and dollar-denominated deposits.
Domestic demand is also booming, fuelled by this confidence. Credit to the private sector has shown double-digit acceleration in year-on-year growth.
"Almost 50% of the growth in gross loans to residents was attributed to the growth in demand for construction, trade, and personal loans," said Genena. "In 2006, we believe loan growth will decelerate to the mid teens as the Central Bank of the UAE is considering the tightening of reserve requirements and a stiffening of credit approval procedures to limit the build up of systematic risks in the banking system."
At the same time, credit growth is not as significant an inflationary pressure as the rise in housing costs.
In 2004, housing and housing-related costs, which represent 36% of the Consumer Price Index (CPI), rose 6.7% and pushed the rate of inflation up from the 3.2% recorded in 2003 to 4.6%. The report concludes that CPI will be just over 6% this year, especially given rising oil prices.
The conclusion of all this, Genena stated, is that it may be "prudent to closely monitor investment expenditure at this stage of the cycle to avoid the build up of excess capacity. With financing sourced easily from the equity market, this risk will remain, even if funding from the banking sector dries up."
Much depends in the short term on how oil prices perform, although few see them coming down any time soon. Certainly, in such circumstances, the NBAD and DFM indexes are likely to continue heading north, even if the odd correction does occur. Yet, the report seems to be saying, it is also important to look at the deeper trend. A future of more sustained yet conservative growth looks likely to lie ahead - as the exuberance of the current period calms into a more comfortable middle age.