New Market Report Now Available: United Arab Emirates Business Forecast Report Q4 2010

Jan. 7, 2011 - PRLog -- Still Weak On The Domestic Demand Front

Although oil prices remain high and some developments in the real estate market may inspire confidence, Dubai's debt problems have not been resolved; and resumption of construction activity will prolong an over-supply situation in the housing market. For Abu Dhabi, the picture is somewhat brighter, with the infrastructure, oil and industrial sectors all having recovered in 2009 and 2010. However, domestic demand remains a weakness across the country, as is evident from still falling rents. A renewed slowdown in the US and Chinese economies, hurting external demand, will therefore be very harmful for growth and financial stability.

The political scene remains largely stable, with the biggest incident over recent months being the deterioration of relations with neighbouring Iran. The implications of this are largely economic. At a time when Dubai is already struggling, the loss of a key export market is clearly detrimental. On the political side, however, we do not expect any major implications. Saudi Arabia, which is more openly anti-Iran and has a large (and relatively poor) Shi'a minority, has not suffered any major political instability as a result of public protests. Dubai's Iranian population on the other hand, though not insignificant, at around 400,000 (out of 1.3mn), is almost entirely anti-regime (hence their migration). So there are unlikely to be any major protests at the government's hardening stance.

The UAE economy will witness a strong rebound in headline growth in 2010, but this will be export driven, with consumption and investment growth remaining very muted, particularly in Dubai. We then see a renewed slowdown in 2011 as base effects wear off. The country will remain vulnerable to external developments, depending on high oil prices, trade and tourism to compensate for a still shaky domestic investment environment. The financial sector remains very sluggish and risk averse, and the debt restructuring process continues, with further company defaults highly possible over the forecast period. We see real GDP growth of 4.8% in 2010, slowing to 3.6% in 2011, before averaging 3.7% over the remainder of the five-year forecast period.

The investment climate has seen some good news in recent months, but the markets remain subdued, and another nasty financial surprise could derail this nascent confidence. Dubai Holding Commercial Operations Group, a real estate and hospitality group owned by the emirate's ruler, recently secured a two-month extension on a US $555mn revolving credit facility that matures this month. It is not clear how it will deal with its remaining US $12bn of debt, and, to illustrate ongoing nervousness, the company's five-year CDS was trading at 1,100bps on July 8. Meanwhile, after dismissing talk of an asset fire sale in late June, Dubai International Capital has apparently appointed Deloitte to review the value of its UK assets, in a sign of further trouble ahead. Even if these two conglomerates secure a reasonably favourable deal such as that agreed between Dubai World and its creditors, it is still likely to mean substantial write-downs for creditors, which will keep investor confidence low over the rest of 2010.

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Fast Market Research is an online aggregator and distributor of market research and business information. We represent the world's top research publishers and analysts and provide quick and easy access to the best competitive intelligence available.