Dubai remains vulnerable to global fiscal turbulence due to its debt and openness to external markets but its advanced infrastructure and strategic location will allow it to record strong growth in the medium term, a key Western financial institution said in a new report.
The Washington-based Institute for International Finance (IIF) said it expected “impressive prospects” for the six Gulf Cooperation Council (GCC) countries this year because of strong oil prices but warned their economies could suffer in case a conflict breaks out between Iran and the West over its nuclear programme.
The report, released in Dubai on Wednesday, projected oil production in the region to rise in 2012 to offset Iranian crude export disruption because of the western boycott, adding that the UAE’s output could rise by 2.5 per cent.
It noted that high oil prices and fiscal surpluses have encouraged Abu Dhabi to press ahead with several of its large projects this year.
This may more then offset a possible weakening of private sector investment and result in nonhydrocarbon growth of 3.1 per cent in 2012, it said.
“In contrast, we expect Dubai’s real growth to decelerate from 3.2 per cent in 2011 to 2.6 per cent in 2012 as a result of the weaker global prospects and the sanctions on Iran, which would adversely impact trade activity,” the report said.
“Dubai is more vulnerable to global economic developments than Saudi Arabia, Qatar, Kuwait, and Abu Dhabi due to its debt, its diversified economy, and its strong links to global trade…..however, Dubai’s excellent infrastructure and its prime location as a global hub for trade and tourism should continue to underpin diversification and robust growth over the medium term.”
Addressing reporters before releasing the report, George Abed, IIF Senior Counselor and IIF Director for Africa and the Middle East, described the prospects for the GCC “impressive” this year.
“Yet there are clearly risks. At a most general level, there is the issue of the impact on the GCC should turbulence in other Arab countries be prolonged. Other risks from the sanctions on Iran indicate ambiguous outcomes,” he said.
“On the one hand, a large drop in Iran’s oil exports, but in the absence of a military confrontation, suggests an upside risk, since it would require significantly higher oil output from the GCC countries, raising the growth rate and lifting hydrocarbon receipts and government spending.”
But he warned that an escalation of the crisis into a military conflict with Iran, even without necessarily the involvement of the GCC countries themselves, could bring about what he described as untold damage to the economies of the region, as such a conflict could easily spread.
Garbis Iradian, IIF Deputy Director, Africa and Middle East Department, said IIF is forecasting some moderation in overall 2012 growth for the GCC at 4.9 per cent after the exceptional rise of 6.9 per cent last year.
“The average masks significant variations in prospects for individual countries. Qatar, Oman and Saudi Arabia will continue to be the strongest performers.”
He said Saudi Arabia, the largest Arab economy, is expected to see growth of about five per cent driven by the continued sizable increase in oil output and the lag effect of the sharp increase in public spending (26 per cent) of last year.
“The modest inflationary pressures in Saudi Arabia will persist, as they reflect local housing bottlenecks and stronger domestic demand.” Iradian added.
“In the UAE, we expect overall growth to moderate to 3.2 per cent in 2012 from an estimated 4.7 per cent in 2011.”
The IIF report showed higher oil prices and production would push the GCC’s external current account surplus to a new record of $358 billion this year, up from an estimated $327 billion in 2011.
It said that a further increase in the stock of net GCC foreign assets would likely take the total to about $1.9 trillion by the end of this year, equivalent to 127 per cent of projected GDP, and then rising to around $2.1 trillion by the end of 2013. It noted that about 60 per cent of the foreign assets of the region are managed by sovereign wealth funds, including the Abu Dhabi Investment Authority (ADIA).
Turning to banking, the report stressed that GCC banks remain well capitalized and profitable. It said the balance sheets of banks in the region have been strengthened as a result of the strong economic performance in recent years, high government participation in banks (ranging between 13 per cent in Kuwait and 52 per cent in the UAE), and improvement in regulation and supervision.
The average capital adequacy ratio is above 15 per cent for every banking system in the region, although variations among individual banks are at times significant, according to the report.
While nonperforming loan (NPL) ratios are in the low single digits, they remain relatively high in Kuwait and the UAE at close to eight per cent.