UAE's growth tipped to hit 2.5%

After stagnating last year, the economy will grow by roughly 2.5 per cent this year, economists predict.

After stagnating last year, the UAE's economy will grow by roughly 2.5 per cent this year, economists predict, as rising global demand for Abu Dhabi's oil offsets weak property prices and buys time to whittle down the debts encumbering Dubai.

While efforts to manage Dubai's estimated US$87 billion (Dh319.55bn) of debt have dominated headlines, the rapid recovery in oil prices in the past year and glimmers of improvement at Dubai's ports may turn out to be a bigger story for the economy, analysts say. This would result in a marked shift in the balance of growth from Dubai to Abu Dhabi, they believe, and would mean that efforts to wean the economy from oil and government investment would temporarily take a back seat to restoring financial stability.

But the bottom line is that the economy will be moving slowly forward again on what economists say could be a more sustainable path than in the go-go years before the crisis. "There is cause for optimism in 2010," said Tim Fox, the chief economist at Emirates NBD in Dubai. Oil's nearly 80 per cent recovery in the past year is therefore a blessing and a curse. Higher crude prices ensure that Abu Dhabi will have plenty of cash to continue investing in development. Abu Dhabi had planned to go into deficit last year to offset the impact of the crisis on the economy. But with oil cresting $80 a barrel, the emirate can afford to boost outlays on projects such as its $7bn subway and a third, $6.8bn airport terminal without falling further into the red. Standard Chartered estimates that Abu Dhabi's economy will grow by 5 per cent this year on the back of such government projects.

Higher oil prices typically mean easier credit in Gulf nations such as the UAE, so some see rising demand for crude thawing the near freeze in bank lending. "We should see banks and deposit growth benefit from rising oil," said Ali Khan, the managing director of Arqaam Capital in Dubai. "It'll help somewhat with rising non-performing loans and encourage banks to embark on loan growth." But Dubai's announcement in late November that it would try to renegotiate debts at Dubai World has dramatically altered the ability and willingness of banks and investors to lend in the UAE, raising borrowing costs for everyone.

Economists say concern about the UAE's standing in international credit markets is overblown, however. The Dubai Government now needs to raise an estimated $6.6bn this year to refinance its own debts and those of the companies it controls. But Abu Dhabi has already made clear that it stands ready to provide cash on top of whatever debt reductions Dubai can negotiate from creditors. And thanks to its oil riches, the UAE does not rely on foreign investment in the way other developing nations do. "If there's a reduction in investment flows it would be negative," said Marios Maratheftis, an economist at Standard Chartered in Dubai. "But it's something that the UAE can deal with and manage."

The larger concern is how the prospect of write-offs at Dubai Inc will affect local lenders and the companies looking to them for funding. Banks in the UAE were already bracing for an increase in loan defaults. Confronted by the prospect of big haircuts to government-controlled borrowers, they will have to set aside even more cash that otherwise would have been lent out to stimulate growth. That means tighter funding conditions for private companies, particularly contractors that are struggling to survive amid delinquent payments from customers, including Dubai.

All in all, that means less spending and investment by the private sector to create jobs and fuel more entrepreneurial, service-oriented businesses that governments across the UAE are eager to promote.