The UAE economy will shrink less than expected this year and return to growth in 2010, according to a new forecast by the IMF. The strengthening price of oil over recent months means the IMF now expects the economy to contract by about 0.2 per cent, instead of the 0.6 per cent it had forecast in May.
It also predicted the Middle East would see 2 per cent growth this year and it revised upwards its forecast for the region for next year to 4.2 per cent, from 3.7 per cent. Crude prices have risen to about $70 a barrel from a five-year low of $32.40 a barrel in December. "With oil now sustaining $60 or $70 it will contribute not only to an improvement in GDP, but as we go forward an oil production increase which we will feel the full effects of next year," said Tim Fox, the chief economist at Emirates NBD Capital.
The country is expected to return to positive growth next year, with the economy likely to expand by 2.4 per cent, according to the report published yesterday. Economic growth should continue to remain positive, increasing by as much as 5.2 per cent in 2014, said the report. The revised GDP forecast helped lift local stock markets, with Abu Dhabi's index climbing to the highest level in a week and the Dubai Financial Market General Index also advancing.
Growth in the GCC's second-largest economy has slowed as a result of the global recession and a decline in oil prices from historic highs of $147 a barrel last year. The economy experienced a sudden reversal in fortune this year after six years of strong growth. Economic expansion reached 7.4 per cent last year. "A decline of 0.2 per cent is not major, but given what went before, anything in negative territory will feel like a recession, although it will be hard to discern whether it actually is," said Mr Fox.
Within the GCC, Kuwait will see the most severe contraction in its economy this year, with the IMF forecasting minus 1.5 per cent GDP for the country. Saudi Arabia's economy will shrink 0.9 per cent, according to the report. Despite the global recession, three GCC member states will record positive growth this year, led by Qatar, whose economy will expand 11.5 per cent, with Oman growing 4.1 per cent and the island kingdom of Bahrain 3 per cent. Regionally, the IMF predicts Qatar's economy will be best positioned to bounce back from the global recession, with GDP at an impressive 18.5 per cent next year.
As a result of efforts to stabilise oil prices, the UAE and other members of OPEC have cut back oil production in the wake of the global recession. But a climb in the price of crude could lead to OPEC countries raising production to meet a pick-up in global demand. "We have pencilled in economic growth in the UAE next year and part of it is driven by a rise in oil production, which we anticipate will be supportive of non-oil activity as it will get liquidity into the system," said Dr Giyas Gokkent, the chief economist and head of research of the asset management group at National Bank of Abu Dhabi.
The IMF's 2009 forecast for the UAE comes after the Central Bank Governor Sultan al Suwaidi cast doubt on the extent of the country's recovery from the global recession, saying on Monday the economy would either finish the year in negative territory or post a small growth. Sheikha Lubna Al Qasimi, the Minister of Foreign Trade, last month said the UAE was on track to achieve 3 per cent growth by the end of the year.
Most UAE economists expect broadly flat economic performance this year. EFG-Hermes predicts a contraction of 4 per cent this year, while Credit Suisse sees a 2.5 per cent decline in the economy. "Among oil exporters [in the Middle East] the UAE's non-oil sector has been most affected by its linkages to global trade and financial markets, and by the fall in real estate prices," said the report. Dubai had been particularly impacted by the correction in asset prices that started in the second quarter of last year.
Sapping the strength of the recovery in Dubai and Bahrain is a shortage of bank credit to the private sector, which dried up following the financial sector problems, it said. But it also cautioned that risks remained for the region's oil exporters if the global recovery was not sustained. Oil exporters with "fiscal room" should continue with policies of maintaining high levels of public spending to help the recovery maintain momentum, the IMF said.
Monetary policy should balance the need to continue supporting domestic demand while avoiding the risk of allowing inflation pressure to build, it said. In an effort to lay the foundation for greater future stability, bank supervisors, particularly those in the GCC, should closely monitor the health of financial institutions. Regular stress testing, assessments of potential recapitalisation needs and the introduction of mechanisms for cross-border supervision are areas bank supervisors should focus on, according to the report.