Shuaa lowers its growth forecast for the Emirates

Investment bank cites lower than expected stimulus measures and slow credit growth.

Shuaa Capital has downgraded its growth forecast for the UAE economy due to a weaker rebound from the global financial crisis than expected. Smaller fiscal stimulus than expected from Abu Dhabi and surprisingly slowcredit growth in the first half of the year prompted the investment bank to revise its GDP forecast to 1.8 per cent from 2.5 per cent.

"Although we believe the UAE economy has emerged from recession in 2010, the recovery has probably not been as strong as we had anticipated at the start of the year," Khatija Haque, the chief economist at Shuaa, wrote in a research paper. The investment bank said recently released budget data for Abu Dhabi showed investment in infrastructure and other spending would be lower than forecast this year.

It said Abu Dhabi had projected a deficit of almost Dh85 billion (US$17.36bn) this year, representing about 14 per cent of forecast GDP. Budgeted expenditure was expected to decline by 22 per cent year on year, with development spending reduced by more than a third, Shuaa said. Details of Abu Dhabi's latest budget position emerged in July with the release of the prospectus distributed to investors by Waha Aerospace.

Shuaa said there were no signs of a recovery in credit growth in the UAE. Weaker than expected deposit growth and the likelihood of liquidity remaining tight has led Shuaa to drop its forecast for bank lending growth to 3 per cent from 6 per cent. "The demand for liquidity from the public sector is likely to contribute to weak private-sector credit growth within the UAE," wrote Ms Haque. Uncertainty over possible future losses was another reason banks may be reluctant to loosen lending restrictions, Shuaa said.

Dubai World announced this month it had reached a near unanimous agreement with creditors to restructure $24.9bn of debt. But the agreement resolves only a portion of Dubai's debt burden. The IMF in February estimated the total stock of Dubai public-sector debt at just under $110bn. "With the redemption schedule for Dubai Inc still onerous even after the Dubai World restructuring, deleveraging in the public sector is likely to weigh on confidence and growth at least until 2012," Ms Haque wrote.

Recent increases in the price of petrol was a sign that authorities were acting cautiously to rebuild fiscal surpluses, or were worried about possible unbudgeted financial outlays they may be required to make in the next couple of years, the bank said. The two increases in the price of petrol so far this year had added about 1.2 percentage points to the headline inflation rate, it said. Inflation edged up 0.9 per cent last month from August last year, driven by price increases in most expenditure groups, data released yesterday by the National Bureau of Statistics showed. Prices rose by 0.53 per cent last month compared with July.