Report Series United Arab Emirates Outlook 2014-15 Executive Summary Economics Department Samba Financial Group P.O. Box 833, Riyadh 11241 Saudi Arabia ChiefEconomist@samba.com +44 207659-8200 (London) This and other publications can be Downloaded from www.samba.com The economy is picking up speed, driven by a recovery in the real estate sector, surging confidence, safe haven inflows, rising populations, easing debt and financing conditions for Dubai Inc., and a resumption of public and private project activity (encouraged by Dubai s hosting of Expo 2020) which is boosting construction. Dubai s traditional non-oil sectors are performing well, the UAE s overall macroeconomic fundamentals are sound, and growth should hold at between 4-5 percent through 2015. Mindful of the need to carefully manage a new surge in investment and growth, the authorities have put in place a number of measures to dampen speculative activities in real estate, and to control credit growth. These include new macro prudential tools as well as higher property transaction taxes. Real estate and share prices have soared over the last 12 months. Abu Dhabi property prices have continued to accelerate, but there are some indications that increases in both stock markets and the Dubai residential real estate sector may now be easing off, offering the prospect of more modest but sustainable gains in the years ahead. Inflation currently remains muted at less than 2 percent, but the trend is upwards, driven largely by rising rents. Domestic credit growth is also accelerating, most notably for construction, which was up 40 percent last year, and for personal loans (up 20-26 percent). Headline domestic credit growth is around 11 percent. Banks remain profitable and sound, but face restrictions on lending, suggesting that finance for the large project pipeline will need to come from multiple sources. While the positive growth outlook will help Dubai Inc. manage its large debt overhang, significant repayment challenges remain as restructured debt falls due. Maintaining easy access to capital markets will be important both for project and refinancing needs. This will make Dubai, in particular, vulnerable to any major shift in market sentiment when US policy rates start to rise next year.
The economy picks up speed It is becoming increasingly clear that the UAE economy is picking up speed, driven by a recovery in the real estate sector, surging confidence, safe haven inflows, rising populations, easing debt and financing conditions for Dubai Inc., and a resumption of public and private project activity (encouraged in part by Dubai s forthcoming hosting of Expo 2020 whose infrastructure needs could top $40 billion) which is boosting construction. These developments are being backed up by the underlying strength of the UAE s macroeconomic fundamentals, largely reflecting Abu Dhabi s exceptionally strong finances which continue to benefit from healthy oil revenues as both prices and production remain elevated. This has allowed increases in both Federal and emirate public sector wages which have helped raise aggregate demand, which has also been boosted by the wealth effect from rising property and share prices. Available high frequency data confirm the positive developments in the non-oil sector, perhaps most clearly indicated by the Purchasing Managers Index (PMI) which hit a record high of 58.3 in April. Encouragingly the employment sub-index rose to its highest level since December 2009. Much of this performance reflects the pickup in Dubai s more diversified economy which is showing signs of robust and broad based growth (as confirmed by first half GDP data for 2013 see chart). Tourism, trade, logistics, manufacturing and services are all doing well, while construction activity is expected to accelerate with the implementation of real estate and infrastructure projects. Meanwhile, the decline in the contribution from the oil sector is now likely to be less of a drag this year than initially expected, as sustained disruptions in Libyan supply have kept UAE production relatively elevated. Overall GDP growth is thus now projected to head towards 5 percent through 2015. While the positive growth outlook will help Dubai Inc. manage its large debt overhang, significant repayment challenges remain. BOX 1 Supply disruptions continue to support oil markets Unusually uncertain and constrained OPEC supply conditions, principally reflecting disruptions in Libya, the new crisis in Iraq, and sanctions on Iran, continue to negate the sustained large 2
gains in North American oil production. Brent has averaged $107/b so far this year and has recently risen back over $114/b as the crisis in Iraq has intensified, although to-date this has not affected the critical oil producing region in the south. The underlying market fundamentals remain relatively bearish as projected increases in non-opec supply growth are expected to exceed global demand growth. However, on the assumption that major supply disruptions continue in Libya, that there is no relaxation of Iranian sanctions this year, and the geopolitical risks remain elevated, we expect prices will hold up at an average of $109/b this year. Downside risks are apparent as there still exists potential for large supply gains in Libya, Iran and Iraq, but we now expect prices will hold at near $100/b through 2015-16. These averages are well above crudely estimated fiscal break even prices for the UAE, variously put at between $65-75/b, and will keep overall external and fiscal balances healthy. Real estate driving construction sector recovery After a major slowdown in the wake of the global financial crisis and the UAE s real estate crash, construction activity is picking up pace again driven by a revival in both public and private/gre real estate developments and infrastructure projects. In particular, the recovery in real estate prices, a rebound in bank financing for construction, and the return of off-plan sales, has allowed developers to move ahead with stalled and new projects in both Dubai and Abu Dhabi. Meanwhile, capital spending by Emirati governments, particularly Abu Dhabi, is resuming after a lull, and Dubai will be looking to raise spending in connection with the 2020 Expo. According to data from MEED, the value of projects planned or underway throughout the UAE has risen 10 percent over the last 12 months to $732 billion. However, while the surge in new projects is encouraging, some questions still remain as to how they will all be financed. With bank lending more highly regulated, recourse to bonds, including possibly domestically listed, will probably feature quite large. Residential property prices rise sharply Residential real estate prices in both Dubai and Abu Dhabi have staged a rapid recovery over the last 12-18 months. Rates of growth have been particularly dramatic in Dubai, although these have started to moderate with year-on-year price increases 3
easing to 23-33 percent in April for mid-range villas and apartments according to data from Cluttons (see charts). In contrast, apartment prices have continued to accelerate in Abu Dhabi to near 30 percent year-on-year, boosted in part by last year s government decree requiring public sector workers to live in the Emirate, as well as new looser foreign ownership regulations. These are extremely rapid increases in prices, although available data suggests that average prices per square foot are still somewhat below the peaks reached in 2008. Real estate fundamentals appear to offer some support The main question is whether the rapid price gains can be supported by underlying demand and supply fundamentals, or are being overly influenced by the return of speculative investors. Assessing this is not easy and available data patchy. That said, analysis from Colliers suggests that residential supply is currently significantly lagging demand in Abu Dhabi, particularly for affordable housing, and will continue to do so through 2018 as the population expands. Meanwhile in Dubai, a surge in safe haven foreign investors, mainly paying cash, combined with demand from the increasing resident expatriate population, appears to have led to a slight shortage of supply in zones where foreigners can buy. More broadly, the number of households in Dubai rose by 7.6 percent in 2013 according to official data. This represents the creation of 25,258 new households at a time when less than 10,000 new residential units were delivered, according to Jones Lang LaSalle (JLLS) data. Such developments would suggest recent price gains have some underlying support. Resident and non-resident demand will drive outlook Both emirates run the risk of overheating driven by speculative investment, but the fundamentals in Abu Dhabi seem stronger. If Colliers supply and demand assessments are accurate, then further moderate price gains are likely to be sustainable. Abu Dhabi s population has grown at near 8 percent a year since 2005, reaching 2.33 million as of mid-2012, and further growth is projected as the economy expands. However, in Dubai there are concerns that the return of speculation, including through offplan sales, could lead to excessive price growth and/or prompt over development. Available demographic and housing data may not be that reliable, making it difficult to predict developments, but JLLS expects around 40,000 new residential units will be completed in Dubai this year and next. If the number of new households continues to grow around recent rates this would 4
suggest that supply and demand should be more or less in balance by 2015 (see chart), underpinning recent price gains, but suggesting more moderate increases. However, much will depend on future demand from foreign buyers. This is hard to predict, but it is noteworthy that these buyers accounted for nearly half of real estate transactions last year, with investments totaling $31 billion according to the Dubai Land Department (DLD). The three top investors by nationality were India ($4.9 billion), the UK ($2.8 billion), and Pakistan ($2.3 billion), while GCC nationals accounted for $9 billion. Managing economic growth The effects of the credit and real estate boom of 2003-08, and subsequent bust of 2009, are still being felt. This is particularly true in Dubai where debt restructuring deals continue to impact GRE financing requirements, and where the government needed to secure a rollover of $20 billion in loans from the central bank/abu Dhabi which had been due to mature this year. Nonetheless, with this rollover, confidence has soared and the UAE is gearing up for another surge in activity, driven by a recovery in real estate investment as well as strong expansion in Dubai s traditional non-oil activities. This time though, the authorities are determined to keep much tighter control over credit growth (which topped 50 percent in the boom years), and have put in place new macro prudential tools to manage GRE borrowing and debt levels, as well as new real estate regulations to cool signs of overheating and speculative (although it will be hard to control investor purchases not reliant on debt). The new measures include tougher mortgage lending regulations and caps on loan amounts. These include maximum permitted loan to values on different transactions i.e. on completed versus off-plan properties and for second mortgages. The DLD has also doubled property transfer taxes from 2 to 4 percent, and leading developers are asking for higher bookings down payments on off plan sales, and accelerated payments upon subsequent sale before handover. Meanwhile the central bank has introduced limits on lending to GREs and on banks total real estate exposure (defined as loans for construction of commercial and residential buildings). Inflation is picking up moderately Currently the overall inflation rate remains contained at less than 2 percent year-on-year (March), compared with double digit rates 5
during 2007-08. However, the trend is clearly upwards, and is being driven largely by rising rents (the rental component of the CPI accounts for 39.3 percent). In line with the recovery in the real estate sector, the housing component of the CPI has continued to accelerate, reaching 2.4 percent year-on-year in March. However, according to real estate consultants, the increase in rents is much larger, with JLLS noting that asking rents in Dubai went up 18 percent last year, while Colliers puts the increase in Abu Dhabi rents at around 12 percent. As is credit growth, especially for construction and personal loans After four years of near stagnation, credit growth is picking up speed, with central bank data showing a moderate 7.1 percent increase in overall loans and advances last year. However, a closer look at the data show that loans, advances & overdrafts to residents rose 11 percent, and that loans for construction soared by 40 percent. In addition, there was a rapid increase in personal loans for business purposes (20.6 percent) and even faster increase for consumption purposes (26.5 percent). Central bank data through August 2013 would suggest mortgage lending has stagnated, but the recent aggregation of mortgage lending with other loans, advances and overdrafts data makes it hard to confirm this trend for the year as a whole. In addition, data from the DLD would suggest mortgage lending has in fact increased rapidly in Dubai. After four years of muted lending, reported mortgage transactions rose 61.1 percent last year to AED8.2 billion, and were up around 25 percent through May this year, compared with the same period in 2013. DLD recorded mortgage transactions hit a peak of AED12.3 billion in 2008. Banks are generally sounds but provisioning remains large Banks in the UAE remain generally sound and profitable, with capital adequacy ratios for the sector as a whole reported at 19.3 percent at end-2013. Deposits have grown strongly and, with loan growth largely limited to the deposit base, the (net of provisions) loan/deposit ratio has remained stable at around 92 percent, down from near 110 percent in 2008 However, the gross loans/deposit ratio is nearer 100 percent, according to new central bank data, suggesting more limited room for loan growth. Meanwhile, regulations now limit loans for construction of commercial and residential real estate to 20 percent of deposits. These stood at $348 billion at end-2013, while lending for construction was $49 billion, equivalent to 14.2 percent of 6
deposits, leaving another $20 billion in available credit. However, it should be noted that provisions continue to grow (up 13.2 percent in 2013) reaching $27.2 billion in February, and the NPL ratio is still running at around 9 percent. These largely reflect the impact on restructuring deals for Dubai s GRE s in the wake of the real estate and economic bust of 2009. Confidence is high and risk perceptions favourable Investor sentiment, both local and international, has turned strongly positive on the UAE, encouraged by robust economic developments and real estate recovery, which have accentuated its relative strengths compared with many emerging markets. With investment opportunities limited, and global liquidity ample, money has mainly flowed into the stock market (see below) and real estate. But UAE bonds and CDS spreads have also benefited, allowing the Dubai government to issue a new oversubscribed 15 year $750 million Sukuk at 5 percent. Ample global liquidity and the search for yields has made it easier and cheaper for UAE entities, including from Dubai, to raise funds in capital markets. Sustaining this access will be important as the large number of projects will require finance from multiple sources due to their size. In this respect the UAE, and more particularly Dubai, will be vulnerable to any major shift in market sentiment, particularly next year when US policy rates are expected to start rising. Stock market surge beginning ease Stock markets in Dubai and Abu Dhabi took off last year, posting gains of 108 percent and 63 percent respectively, and continued to soar this year before running out of steam in April/May. A number of factors appear to have driven this performance mainly centered on the aforementioned rebound in growth and confidence, as well as anticipation of inflows following the graduation of the two bourses to MSCI emerging market status in June which could attract $500-900 million in inflows. However, there is a sense that shares had shot up too far and too fast, and in May this year both stock markets saw sell-offs. Certainly valuations in Dubai had appeared stretched with estimated PE ratios topping 20 before the downturn, although Abu Dhabi s valuations appeared more grounded, trading at a PE of around 14 (see chart). Both the Dubai and Abu Dhabi indices remain below the highs registered just before the 2008 slump, and earnings should be supported by the economic recovery. But markets are now likely 7
to be more volatile, particularly as individual investors dominate, and a rush to take profits could accentuate any downturns. New inflows will help provide some support, and as of May 29 markets had stabilized. Nonetheless, prospects seem vulnerable to local real estate developments, as well as global investment trends as markets react to interest rate developments in the US. Public finances strong The lack of timely and comprehensive fiscal data for all the emirates makes analysis difficult, but it is clear that the UAE s consolidated fiscal accounts are on the mend after a deterioration driven by earlier large expenditures to support GREs and banks in the wake of the financial crisis. While Dubai continues to run a small fiscal deficit (targeted at 0.2 percent of GDP for 2014 or $240 million), Abu Dhabi s balances have benefited from strong oil prices, and this has ensured a return to healthy surplus on the consolidated accounts, estimated 10 percent of GDP 2013. We expect this surplus will slip to around 6 percent of GDP by 2015 as oil prices begin to soften and as government spending picks up again (Abu Dhabi Executive Council have approved $90 billion in capital spending for 2013-17). Meanwhile external balances will remain healthy with the current account surplus holding at around 10 percent of GDP, while external assets (mainly held by ADIA) continue to provide a healthy buffer equivalent to over 100 percent of GDP. Debt overhang still casts a shadow While the UAE s consolidated government finances are strong, this masks some still difficult debt positions among GREs, and a relatively high level of Dubai government debt. Although they face large repayment obligations, GREs in Abu Dhabi will mostly benefit from implicit support from the government. Meanwhile, those in Dubai continue to work through debt restructuring deals and also face large associated repayment obligations over the next few years. There is still some uncertainty as to how all these obligations will be met, particularly as asset disposals appear not to be proceeding as planned, although some stronger GREs have been able to make early repayments. This includes Nakheel which has benefited from the recovery in real estate. The sums are large, as both Dubai s and Abu Dhabi s GREs carry debt totaling around $95 billion each (according to IMF estimates including GREs with less than 50 percent government ownership). 8
On top of this Dubai government debt stands at around $55 billion (56 percent of GDP). The recent rolling over of the $20 billion obligation to the central bank/abu Dhabi on more favourable terms has removed some uncertainty and boosted confidence. The loans were used to fund the Dubai Financial Support Fund (DFSF) which in turn provided finance to troubled GREs, who may indirectly benefit. GRE repayment obligations Government of Dubai outstanding direct debt Bonds $ bn maturity Dubia DOF sukuk 1.9 2014 Euro medium term note 0.5 2015 Dubai DOF Wakala sukuk 0.9 2016 Euro medium term note 0.8 2020 Euro medium term note 0.5 2021 Dubia DOF sukuk 0.7 2022 Dubia DOF sukuk 0.8 2023 Dubia DOF sukuk 0.8 2023 Dubia DOF sukuk 0.3 2023 Dubia DOF sukuk 0.8 2029 Euro medium term note 0.3 2043 Bilateral/syndicated facilies Ijarah Facility 0.1 2014-15 DFSF term loan facility 0.3 2016 DFSF wakala facility 0.2 2014-17 DOF China constrution bank 1.0 2017 ENMD loan 25 Others 0.4 2015-18 Related party debt Gov Dubai $10 bn notes 10.0 2014 DOF Abu Dhabi $10 bn 10.0 2014 Total direct debt 54.8 % of GDP 56.0 Guarantees 5.8 Various GRE 3.1 2017 Dubai World 2.2 2018 Others 0.5 Total debt inc guarantees 60.6 % of GDP 62.0 Source: Dubai bond prospectus BofA Merrrill Lynch In total, Dubai s GREs need to make repayments of around $36 billion during 2014-16, while Abu Dhabi s GREs need to repay near $33 billion. Further ahead, Dubai World needs to meet a $8 billion repayments in 2018. Progress with restructured debt repayments will have a major bearing on the Dubai government which, apart from the operations of the DFSF, has guaranteed repayments totaling $3.1 billion in 2017, and a further $2.2 billion in 2018 for Dubai World. Main Economic Indicators 2010 2011 2012 2013e 2014f 2015f Nominal GDP ($ bn) 287.7 345.7 377.0 409.3 439.6 477.7 GDP per capita ($ '000) 61,944 72,956 78,008 83,183 87,922 93,662 Real GDP (% change) 1.7 4.0 4.2 4.5 4.7 5.1 Hydrocarbon GDP 3.8 6.6 5.2 4.1 0.9 1.9 Non-hydrocarbon GDP 0.7 2.6 3.8 4.7 6.6 6.5 Nominal GDP (% change) 13.0 22.0 8.0 8.0 7.4 8.7 Hydrocarbon GDP 34.1 49.4 15.0 8.7-3.3-6.7 Non-hydrocarbon GDP 3.1 6.0 6.0 10.0 11.0 9.0 CPI inflation (% change) 0.9 0.9 0.7 1.5 2.7 3.6 Hydrocarbon exports ($ bn) 74.7 111.6 118.1 128.4 124.2 115.9 C/A balance ($ bn) 4.9 47.9 63.5 63.0 54.6 43.9 (% GDP) 1.7 13.9 16.8 15.4 12.4 9.2 External debt ($ bn) 138.7 136.9 142.1 170.0 173.0 177.0 (% GDP) 48.2 39.6 37.7 41.5 39.4 37.1 Fiscal balance ($ bn) -5.0 38.0 50.9 39.2 30.1 25.5 (% GDP) -1.7 11.0 13.4 9.6 6.8 5.3 International reserves ($ bn) 33 37 47 68 70 75 Crude oil prod (m b/d) 2310 2550 2630 2730 2730 2750 NGL prod (m b/d) 550 700 808 880 890 890 Nat gas prod (m boe/d) 931 939 1056 1070 1100 1110 Source: Samba, IMF, IIF, national authorities 9
James Reeve Deputy Chief Economist James.Reeve@samba.com Andrew Gilmour Deputy Chief Economist Andrew.Gilmour@samba.com Thomas Simmons Economist Thomas.Simmons@samba.com 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 11421 Saudi Arabia 10