Plenty of insight on the UAE economy – and most of it is good

Several big reports paint a mixed picture of the state of the UAE economy and its financial system, but on the whole the message is positive as the country moves into a crucial period.

The “teenage scribblers” (the pejorative term once used by a British finance minister for economic and investment analysts) have been busy again, with several big reports coming in the past few weeks from well-respected research houses.

They paint a mixed picture of the state of the UAE economy and its financial system, but on the whole the message is positive as the country moves into a crucial period. Despite some minor caveats, this is definitely a “glass three quarters full” ­scenario.

Two bits of work from Capital Economics, the London research consultancy that can always be relied upon to produce hard-hitting, warts-and-all work, tackle two of the big issues in the UAE at the moment: the state-of-play in still-indebted Dubai, and the country’s banking system.

On the first, CapEcon reflects on the recent agreement reached between the governments of Dubai and Abu Dhabi on the terms of the US$20 billion worth of loans granted by the capital in 2010 at the peak of the crisis.

That a deal, which was never seriously in doubt in the view of local experts, “marks another important step in Dubai’s economic recovery and builds on its strong economic performance last year”, says CapEcon.

What the consultancy finds still of concern is the state of play of debts owed by government-related enterprises, which were at the heart of the 2010 problems but which were successfully renegotiated back then.

But the bills still have to be paid. GREs still have some $35bn of debt maturing over the next three years, equivalent to about 25 per cent of the emirate’s GDP. How they will do this depends on three factors: positive investor sentiment holding up in Dubai; a continuation of the tourist boom from other GCC countries (which depends partly on the feel-good factor of the oil price); and the pace of asset sales.

Dubai World’s maturing debts of about $14.5bn over the next four years is the biggest element in this. With the appointment of the US advisers Blackstone, we are promised a “fresh pair of eyes” on the issue.

The second piece of research is in answer to the question: “Is it time to sound the all-clear on the UAE’s banks?” The answer is overwhelmingly positive.

Banks have rebuilt their capital buffers since the crisis, funding structures are now more stable and rising property prices are increasing the value of many of the assets held on their balance sheets. Even the regulators get a pat on the back for the way they have handled it.

So credit growth should accelerate in the next few years, though in a rather more cautious way than in the boom time.

The next bit of analysis comes from Deutsche Bank, and is rather more specialised. It looks at the effect the upgrade to emerging market status will have on the regional investment scene. It reaches a significant conclusion: more stocks than previously thought will be included in the list of equities selected by MSCI, the index ­compilers.

DB now thinks that a total of 15 stocks from Qatar and 12 from the UAE will be eligible, compared with nine and eight respectively a few months ago. The increase largely reflects the re-rating of indexes in the two countries that has been going on over the past 16 months or so, and the greater number of companies that have or intend to raise foreign ownership ­limits.

The UAE led the region in fund inflows last year, with $954 million coming in to the country. (Qatar stood at $848m of inflows. So the surge of foreign investor interest in the GCC has already begun.)

Which usefully introduces the final piece of research. The Economist Intelligence Unit published a weighty tome entitled “The business environment in GCC countries” which concluded that, while there had been some improvement, there were still plenty of negatives in the regional investment scene.

“Substantial risks remain … lingering restrictions slow the pace of foreign investment … distinct challenges for investors … questions about the economic viability of the strategy [post Arab Spring]”. These are just some of the caveats the EIU employs.

It just goes to show you cannot please everybody.

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