Higher oil prices cited in expanded GDP forecast

The UAE economy is looking up this year thanks to higher oil output and a boost to tourism and bankingbecause of regional unrest, says the Institute of International Finance (IIF).

It raised its GDP forecast for the year to 4.4 per cent from 3.8 per cent previously.

"Most indicators of economic activity have registered a significant rise in real terms in the first half of this year," the IIF said in a report this month on the UAE economy.

The Washington-based banking lobby's GDP forecast for this year is above the 3.3 per cent estimate of the IMF but below the 4.6 per cent forecast by Emirates NDB, the UAE's largest bank by assets.

The UAE recently revised its national accounts, reflecting broad-based changes across key sectors of the economy including oil and gas, retail and property.

Under the revision, nominal GDP is about 20 per cent higher than previous estimates for the past several years, lowering key ratios such as debt to GDP, the IIF said.

The authorities' changing of the base year for forecasting GDP from 1995 to 2007, when oil prices were substantially higher, was also important, it said. As a result, the oil sector's share of total GDP was significantly higher than previous estimates.

Economic prospects have picked up this year mainly because of increases in oil output. Like other Gulf states, the UAE lifted oil production to offset the loss of supply from Libya, where output has stopped because of civil war.

Significant increases in government spending on infrastructure in Abu Dhabi and the Northern Emirates have helped GDP expansion, the IIF said.

Tourism and banking have benefited from political turmoil elsewhere in the region, it said.

Hotel occupancy in Dubai rose to 83 per cent in the first five months of the year from 80 per cent in the same period last year, the IIF said. In the same period, hotel occupancy in Abu Dhabi rose from 75 per cent to 80 per cent. In contrast, room occupancies in Manama, Cairo, Damascus and Beirut dropped sharply, the report said.

Banks had also reaped rewards from the so-called Arab Spring, according to the IIF.

"The regional unrest has prompted high net worth individuals from the troubled Arab countries to move some of their savings and investment to more stable markets such as the UAE," it said.

In absolute terms, the Dh74 billion (US$20.14bn) rise in bank deposits in the first five months of the year outstripped the Dh67bn increase for all of last year.

Concerns about Dubai's debt had receded after recent revisions of payment schedules, meaning the emirate's financial position had "improved markedly", the IIF said. Dubai World, which is owned by the emirate's government, recently finalised a deal with banks to restructure $24.9bn of debt.

The decrease in bond yields and the cost of insuring Dubai's debt against default since the start of the year reflected investor confidence in the ability of the Government and related corporations to meet debt obligations, the IIF said.

"Nevertheless, Dubai's high debt levels remain a source of risk for the current economic recovery, especially given the depth of the decline in real estate prices," the IIF warned.