The United Arab Emirates Economic Outlook

Transcription

1 Report Series The United Arab Emirates Economic Outlook Executive Summary Economics Department Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia (London) This and other publications can be Downloaded from Real GDP growth reached 4.2 percent in 2012 driven by another expansion in oil production as well as a healthy performance in the non-oil sector. High frequency data show that the non-oil sector is continuing to perform well and, supported by a recovery in real estate, this should keep growth at over 3 percent a year through , despite a weak contribution from the oil sector. The UAE s consolidated public finances remain strong with large fiscal and current account surpluses (9.2 and 15 percent of GDP respectively in 2012) helping bolster external assets, particularly of ADIA. Softer oil prices will see these surpluses reduced going forward, but the UAE will remain a large net external creditor. Dubai Inc. has weathered its debt crisis through a series of successful GRE restructurings, and has benefited from a recovery in its economy, and favorable access to capital markets. Most of the $20 billion falling due to Abu Dhabi and the central bank in 2014 is expected to be rolled over. But Dubai still needs to make asset sales and maintain access to capital markets to be sure of meeting other restructured debt obligations falling due Domestic credit growth has been held back by rising nonperforming loans and exposure to GRE restructurings. The banking system is generally sound and we expect some pick up in lending as economic activity strengthens and the real estate recovery helps strengthen balances sheets in GREs. However, the central bank will be keen to prevent a repeat of the earlier unsustainable credit boom and inflation of property prices. Inflation remains muted but will pick up in line with the recovery in real estate to 2.5 percent by The exchange rate peg to the dollar will be maintained, implying low policy rates through 2015, although macro-prudential policies will tame credit growth.

2 Growth remains steady in 2012 July 2013 Real GDP growth is estimated at 4.2 percent for 2012, driven by another expansion in hydrocarbons output (crude, NGLs, gas) as well as a healthy performance in the non-hydrocarbons sector. IMF estimates suggest that non-oil growth picked up to 3.5 percent in 2012, led by Dubai s core activities of transport, tourism, logistics and trade (Dubai Statistics Centre Data point to 4.4 percent growth in Dubai for the year). Strong public/gre spending also helped drive construction activity and boost consumption; the latter reflected in healthy point of sale transactions (a proxy indicator for retail sales). Supported by both the 2011 increase in public sector salaries, and improving employment conditions in the private sector in general, total transactions were up nearly 29 percent in 2012, while the value of those transactions was over 21 percent higher than in High frequency data point to sustained expansion More frequent activity indicators suggest that non-oil sector growth will remain robust this year. Having grown by nearly 4 percent in 2012, freight volumes at Dubai International Airport were up 11.5 percent in the first four months to April. Passenger arrivals also continue to grow at double digit rates. High end hotel occupancy rates also remain strong, hitting an average of 88.2 percent through April in Dubai, and just under 80 percent in Abu Dhabi according to Hotistats data. More broadly the UAE wide HSBC/Markit Purchasing Managers Index (PMI) continues to point to robust growth in non-oil private sector companies. The PMI has remained solidly in positive territory through May, holding at between (any number over 50 represents expansion). Encouragingly the new orders sub component is particularly strong (61.2 in May) suggesting companies will continue to expand. The employment component has also been healthy, implying new jobs continue to be created which will help sustain consumption growth. Real estate sector is on the mend and equities have surged It is also increasingly apparent that the real estate sector in the UAE is on the mend. Available data point to a stabilization in Abu Dhabi property markets, and a recovery in Dubai where midrange apartment and villa prices are up over 45 percent year-onyear according to Cluttons data for May. However, large supply and upcoming completions are a feature throughout the UAE real estate sector, and will continue to weigh on markets, particularly in Abu Dhabi. Meanwhile, although susceptible to sell offs in global markets, both the Abu Dhabi and Dubai stock markets are performing exceptionally well, posting gains of 40 and 48 percent respectively as of mid- June. The announced graduation to the MSCI Emerging Markets index with effect from May 2014 will likely provide further underpinning to UAE share prices. 2

3 Government of Dubai outstanding direct debt Public notes $ bn maturity Euro medium term note Euro medium term note Euro medium term note Euro medium term note Dubai DOF Wakala sukuk Dubia DOF sukuk Dubia DOF sukuk Dubia DOF sukuk Bilateral/syndicated facilies Ijarah Facility /15 Term loan facility DOF China constrution bank Others Related party debt ( DFSF - $20bn) Gov Dubai $10 bn notes DOF Abu Dhabi $10 bn Total direct debt 29.6 % GDP 29.8% Local Bank borrowing* 21.4 Total inc. est. local bank debt 51.0 % GDP 51.5% Source: Dubai gov. MTNP prospectus * ENBD "sovereign" loans Dubai GRE restructuring nearing completion Debt problems in Dubai s GRE s and a collapse in real estate prices were at the core of the 2009 crisis and associated need for large scale restructuring agreements. These are now nearing completion, with the last major deal (for the Dubai Group) expected to be finalised soon. At the same time though, obligations on earlier agreements are starting to fall due, most notably the $20 billion in funding from Abu Dhabi and the central bank to the Dubai Financial Support Fund (which in turn provided financing to GREs). This falls due in While it is widely expected by markets that the bulk of this debt will be rolled over with maybe some partial repayments, attention will soon turn to the large obligations also falling due on restructured Dubai World and Nakheel debt during The plan was that asset sales would raise funds to help meet future repayments, although progress on this front has been very slow. In the meantime, GREs operating on commercial terms can, and have been, borrowing on their own credit strength, pushing total Dubai GRE debt up to $93 billion from $84 billion last year according to the IMF. The recovery in real estate has helped boost the balance sheets of many GREs, but the approximately $60 billion in debt falling due during , will present a significant financing challenge and require continued easy access to capital markets. Positive economic outlook despite falling contribution from oil Last year crude and NGL production in the UAE rose strongly as OPEC GCC producers moved to cover the sanctions related reduction in Iranian supply. However, given global oil market dynamics, particularly the sustained expansion in North American supply, there is little scope for further gains this year, and both crude and NGL production are likely to stagnate, adding little impetus to real GDP growth. Nonetheless, with average oil prices still above $100/b, revenues will remain strong and supportive of sustained public spending activity. In addition, the non-oil sector continues to perform well and confidence has been boosted by the recovery in real estate. We expect that nonoil growth will continue to accelerate this year (4.1 percent) and next (4.5 percent), aided by the UAE s perceived position as a safe haven in the troubled broader MENA region. This will help keep overall real GDP growth at just over 3 percent a year through (see table at end). However risks are apparent Although we see a favourable growth outlook for the UAE, this is dependent on global economic and financial market developments remaining supportive, and that there is no prolonged drop in oil prices. Dubai s open economy is particularly vulnerable to downturns in global growth, especially in Asia. It is also dependent on global capital markets to finance 3

4 World Economic Outlook f 2014f Real GDP growth (percent change) World US Japan Euro area China Emerging Markets Official policy rate (end period) US Japan Euro area Oil Price ($/b period average) Brent Samba estimates and forecasts much of its large GRE debt, as well as its sovereign debt (estimated at around 50 percent of GDP, including loans from local banks), and to facilitate asset sales as part of GRE restructuring agreements. The current strains in global financial markets as participants consider a world without US quantitative easing may thus present some concerns. That said, economic fundamentals in the UAE as a whole remain strong, and Dubai s own finances are improving, suggesting it is unlikely that market support will be withdrawn. However, costs may rise and more marginal and over ambitious projects could struggle, and it will be important that the Dubai Group restructuring is completed successfully by midyear. In addition, as pointed out by the IMF in its Concluding Statement for the 2013 Article IV mission, care needs to be taken that improved sentiment fuelled by rising real estate prices and loose global liquidity conditions does not lead to a renewed cycle of imprudent risk taking and re-leveraging by GRE s and private companies. Box 1: Global environment Global economic activity remains uneven. In the US, private consumption has held up well in the face of higher taxes, and has been supported by improving asset prices, record low interest rates and weaker gasoline prices. Even the fiscal situation has improved sharply in recent months. Japan s economy is also recovering, driven forward by bold new policy initiatives, including massive quantitative easing (QE). But the Eurozone is a different story, with six consecutive quarters of contraction and little prospect of an early recovery given elevated unemployment and sustained fiscal consolidation. China s prospects have also worsened, with slowing investment and consumption compounded by a contraction in manufacturing, while emerging markets in general have softened. The conflicting performances suggest global growth will hold at just over 3 percent this year with a stronger recovery possible in Financial markets were extremely buoyant in the first quarter, with equities and bonds bolstered by monetary easing around the globe in a low inflation environment. This includes the new QE programme in Japan and rate cuts in the Eurozone and many emerging markets. However, signs that QE in the USA might be wound down earlier than anticipated, coupled with weaker Chinese data, led to a wide sell off in May/June and increased volatility. Most notably the long rally in bond markets appears to have ended and yields have started to rise. While markets may be jumping the gun somewhat the Fed Fund rate is widely expected to remain near zero through to the indiscriminate search for yield may be over, suggesting economic fundamentals will return to the fore and funding costs rise. 4

5 Oil prices have been range bound at between $ /b for Brent. Fundamentals remain soft on the back of continued growth in North American unconventional supply and muted global demand. Although risks appear on the downside, we maintain our $107/b average price projection for the year, but have reduced our 2014 projection to $101/b. Market perceptions of the UAE remain favourable. CDS spreads for Abu Dhabi and Dubai have been falling steadily since mid and, despite a small hic up in May/June remain lower than at the start of the year (68 and 231 respectively). A similar trend is apparent in bond yields with Dubai s 10 year sovereign (maturing 10/05/20) holding at under 4 percent, while Abu Dhabi s (04/08/2019) has fluctuated between 1.7 and 2 percent this year. Inflationary pressures appear muted Official data show that inflation in the UAE remains muted at just under 1 percent y-o-y in April. However, the housing/rent component of the CPI is edging back to positive territory (-0.1% y-o-y April) consistent with reported recovery in real estate prices. Given its heavy weighting in the CPI this rising trend is expect to push inflation higher over the coming months. In addition, price pressures are apparent in the services sector where education, recreation and culture costs have risen. Food prices were up modestly at 2.5 percent y-o-y in April, but otherwise inflationary pressures have been muted. Looking ahead, weak commodity prices will help dampen inflation, but we expect that reviving economic activity and aggregate demand, together with the impact of rising real estate prices, will raise the inflation rate to 2 percent this year and further to 2.5 percent in It also should be noted that the official CPI data does not accurately reflect the costs incurred by the dominant expatriate population who do not benefit from state subsidies and other measures to shield nationals from rising costs. Consolidated fiscal accounts still strong Analyses of the UAE s fiscal accounts are complicated by a lack of detailed data, and the linkages between the individual emirate accounts, especially between the dominant Abu Dhabi accounts and the Federal budget. In addition, treatment of oil earnings is not straightforward, as a large proportion is paid directly into government reserve accounts rather than the budget. As a result official published emirate budget data tends to understate the true strength of public finances. That said, consolidated fiscal accounts constructed by the IMF point to a healthy improvement in the UAE s finances in 2012 when the fiscal surplus is estimated to have surged back to 9.3 percent of GDP from around 3 percent in 2011, and deficits in

6 Spending rose sharply in the wake of the 2008 financial crisis, particularly to prop up struggling GREs, and received another boost in 2011 as social spending (both wages and capital projects) was ramped up in response to the Arab Spring. However, since then there has been a consolidation in spending, while revenues have expanded in line with stronger oil prices and production. Priority capital projects continue to be financed, but there have been efforts to control other spending, particularly in Dubai, and there has been a reduction in large one off payments to GREs. This is perhaps most clearly reflected in the estimated fiscal break even oil price. According to IMF estimates, this jumped from $23.4/b in 2008 to $92.4/b in 2011, but has since dropped back below $80/b in 2012, and is projected to fall below $70/b through Our own calculations are somewhat higher, but remain well below our projected oil prices ($107/b in 2013, $101/b in 2012). We thus continue to expect that the UAE will run healthy fiscal surpluses of around 6 percent a year. Banking system faces challenges but remains sound The ability of domestic banks to finance investment and growth is somewhat constrained, particularly in Dubai where they are already significantly exposed to GREs and the sovereign (one bank alone reports $20 billion of exposure to the Dubai sovereign ) and face large non-performing- loans (NPLs). These hit 8.7 percent at end Further GRE restructuring could still add to this level, but the banking system maintains significant capital and liquidity buffers. Joint IMF/central bank stress tests show that it can still absorb a significant increase in NPLs, with only a few banks falling somewhat below the mandated minimum capital adequacy ratio in the event of an extreme shock. Credit growth still muted Bank deposits have begun to pick up again following a drop in the first half of 2012, helping improve UAE bank liquidity positions. Interbank rates have declined in response, and have fallen below 1 percent for 3 months (0.9 percent), while money supply growth has revived with M2 up 5 percent in the first quarter of this year. Despite improving liquidity conditions, lower aggregate loan-to-deposit ratios (90 percent) and sound capital adequacy ratios (20.2 percent as of March 2013), domestic credit growth remains weak, held back by large provisioning requirements -much of which stems from GRE restructuring - and tighter lending regulations. Total bank provisions rose 19 percent in 2012 and were up another 4 percent in the year to April 2013 at $24.2 billion. Available data show that bank lending to the government and to the construction has been strong, but overall credit growth to the private sector remains stalled, growing by just 1.6 percent in 2012 according to central bank data. Looking ahead we expect some revival in credit growth to 6

7 the private sector (January data shows 3.5 percent growth y-o-y) as economic activity strengthens and the drag from GREs debt restructuring wanes. But overall domestic credit growth is likely to remain muted at around 5 percent. Monetary policy accommodative but with checks There seems little prospect of a change in the exchange rate peg to the US dollar. As such, UAE policy rates will broadly follows those in the US which are set to remain low through end This will suit the UAE which, on official data, does not face undue inflationary pressures and wants to revive lending to support growth. However, while interest rates are expected to remain low, the authorities are determined to prevent a repeat of the earlier unsustainable credit boom, particularly one that inflates another property bubble. As such, the central bank has and is introducing legislation to tighten lending practises. This includes new laws on personal and automotive loans, limits on lending to local governments and GREs, and the more recent new mortgage legislation. There may well be some delays in implementation given push back from banks, but the trend is clear. As noted by the IMF, the main concern is that rapid credit expansion and undue loan concentration to this sector (GREs) be avoided to lessen the risk of a renewed boom-bust cycle and to safeguard financial stability. Current account in healthy surplus The UAE continues to run healthy current account surpluses with Dubai s growing exports of goods and services adding to Abu Dhabi s large oil earnings. Recent IMF data suggest that the surplus rose to 15 percent of GDP in 2012 and, although declining somewhat in line with our softer oil price outlook, we project that it will remain above 10 percent of GDP through These surpluses will help bolster external assets, particularly of the Abu Dhabi sovereign wealth fund, ADIA. Official data on total UAE external assets is not available, but the IIF projects that they will exceed it external obligations by $480 billion by end Debt concerns While the current account surplus is healthy and external assets are large, external debt concerns are still apparent, particularly for Dubai Inc., given the uneven distribution of the debt and access to oil revenues. A lack of accurate data covering all corporate and GREs also makes analysis of debt positions difficult: the figures quoted in the IMF Article IV concluding statement (38 percent of GDP in 2012) only show foreign liabilities of the banking system due to incomplete coverage of debt raised by non-banks in the international markets. That said, all efforts have been made to meet external obligations and this will continue. As noted earlier Abu Dhabi is expected to rollover most of the $20 billion of DFSF debt falling due next year 7

8 easing the pressure on Dubai, while markets are still likely to look favourably on refinancing requests. When Dubai went to the market earlier this year it received $15 billion in orders for a $1.25 billion Sukuk issuance. Dubai faces projected financing needs of $9.5 billion in 2013, down from $14.6 billion last year, while Abu Dhabi needs to raise $18.8 billion according to IMF data, although this could be updated in the forthcoming Article IV report. 8

9 James Reeve Deputy Chief Economist Andrew Gilmour Deputy Chief Economist Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and should not be treated as a substitute for specific advice and due diligence concerning individual situations; 2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or 3. Are not intended to constitute a guarantee of future performance. Accordingly, no representation or warranty is made or implied, in fact or in law, including but not limited to the implied warranties of merchantability and fitness for a particular purpose notwithstanding the form (e.g., contract, negligence or otherwise), in which any legal or equitable action may be brought against SAMBA. Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia 9