The boom in the Arab Gulf is well and truly over. The global credit crunch and economic downturn, coupled with falling oil prices, have hit the region with a vengeance. Many observers assumed that this region would largely be immune from the turmoil elsewhere, but this has not proved to be the case. Things started to go wrong in November and December last year, and have steadily got worse.
Economic growth in the oil-rich Gulf Co-operation Council (GCC) – which comprises Saudi Arabia, United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar – will be down sharply this year, and fiscal and current account surpluses are giving way to deficits.
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Although recession is unlikely if oil prices remain above $45 a barrel, it will feel like a recession because the fall in real GDP growth will be from a great height – some countries have achieved double-digit growth in the past few years. And if oil prices fall further, recession is a distinct possibility for the GCC.
UAE-based Simon Williams, an economist at HSBC Middle East, predicts that real GDP growth in the UAE will slow to 1.1% this year, from 7% in 2008. “However, we believe the region is well placed to weather the impact of this abrupt downturn,” he says.
“The immense surpluses the region has run over the past five years now offer the Gulf room to manoeuvre, which should ensure that stability is maintained, the banking sector is protected and debt obligations continue to be met,” he adds. “The region’s sovereign wealth funds will be required to change tack as surpluses recede and local financing needs mount. Rather than acquiring assets overseas, we expect outflows to dry, and even reverse, as 2009 progresses.”
With oil at $45 a barrel, Mr Williams expects the UAE, along with Kuwait among the other GCC states, to maintain budget surpluses. Qatar will be close to balance.
“The impact of declining revenues on spending growth in these three states should be limited, and we expect double-digit gains in spending throughout 2009,” Mr Williams says.
However, the UAE, a federal state, is hugely reliant on the oil wealth of Abu Dhabi. Without transfers from the wealthiest emirate, the fiscal position of the others will be strained. “Dubai in particular is likely to see revenue fall significantly as a drop in earnings from its small oil output is compounded by declining earnings from fees and indirect taxes, as economic growth slows,” he says.
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Developments mothballed
Dubai relies on international trade, finance and tourism for most of its income, and all have been hit by global events. Infrastructure projects and real estate developments – heavily reliant on debt and equity finance raised in the international markets – have been scaled down or mothballed.
The central bank of the UAE, based in Abu Dhabi, bought half of a $20bn five-year bond issued by the Dubai government in February. The bond was proof that Dubai was in trouble and had to do something about its $80bn debt hole; the central bank’s investment was proof that the federal government was prepared to help it out.
The UAE’s banking sector is suffering in common with the rest of the world, but so far has not had any notable casualties. How long that will remain the case is anyone’s guess, but most banks have lent heavily to the real estate and construction sectors – the sectors that fed the Dubai boom and which are now grinding to a halt.
All banks and companies are having a difficult time. “If some of the big companies go under, they will take a lot of investors with them and there will be a high degree of personal insolvencies,” says Naser Nabulsi, executive chairman of Dubai investment bank Al Mal Capital. “Individual investors are not as diversified here as they are in North America and Europe. We had 80 staff, but had to lay off 20% at the end of last year. But we are in it for the long term.”
He also believes Dubai’s future is secure. “There will be lower growth this year and next, but Dubai is coming down from a high and it has built a strong infrastructure. Low growth or recession may last two or three years, but people still want to come here. When the world economy recovers, Dubai will be one of the first to benefit.”
Islamic banks feel the pinch
Islamic banks, of which there are nearly 40 in the UAE according to The Banker magazine’s Top 500 Islamic Financial Institutions published last November, appear to have been less hard hit than conventional banks. This is partly due to the fact that they have not invested in toxic assets or speculated, which is against their principles. Even so, they still belong to the banking eco-system and are therefore suffering like others from a lack of liquidity and the economic slowdown.
Many new Islamic institutions sprang up last year. Noor Islamic Bank in Dubai was one such, created in January 2008. The owners comprise two Dubai government entities (50%), the federal government (5%) and 15 individual shareholders (45%).
Since the Dubai International Financial Centre (DIFC) free zone opened in 2004, it has become the world’s fastest growing financial centre. It is home to hundreds of banks, insurance companies, asset managers and support services companies from around the world and the region who pay no tax on profits and face no restrictions on foreign exchange or repatriation of capital.
“There has been quite a bit of belt-tightening among the business community in the UAE, and within the DIFC as well,” admits DIFC chief executive Nasser Alshaali. “Generally, the DIFC is going to see roughly only half the growth in 2009 that we saw in 2008. We ended last year with more than 750 companies located here, having started the year with 550. In 2009 we are expecting to add about 100 more companies.
“The international community knows that the fundamentals that were here before the crisis are still here. We have the demographics – 50% of the population is under 21. We have the resources – not just oil and gas, but other minerals. And we have the assets, built up over the past couple of decades. Those three fundamentals remain relevant.”
Giyas Gokkent, chief economist and co-head of asset management at the National Bank of Abu Dhabi, says the best course of action was for the government to keep spending. “A good thing about recession is that the seeds of recovery are always built in. The economy has to involve some level of adjustment, and over time things will improve again.”
Spend, spend, spend
In the meantime, UAE governments must keep their nerve and continue to support projects that are already started or planned. “They need to spend, spend, spend,” says Mr Gokkent.
The ability to continue spending will depend to a large extent on the oil price not falling too much. But even if it does fall, Abu Dhabi’s colossal accumulated wealth, the fact that it has the world’s biggest sovereign wealth fund, and its commitment to continue with its relatively new domestic development plans indicate that if any country can spend its way out of the global recession, the UAE can.
COUNTRY PROFILE
United Arab Emirates
Population: 4.79 million
Pop. growth rate: 3.68%
Area: 83,600 sq km
Real GDP growth: 8.5%
GDP per capita: $40,400
Current account: $36.41bn
Largest sector Industry (% of GDP): 61.8%
Labour force: 3.26 million
Unemployment rate: 2.4%