UAE GDP growth up 3.9% in 2012, expected to be up further 3.1% in 2013

UAE GDP growth up 3.9% in 2012, expected to be up further 3.1% in 2013

Led by non-oil sectors that would continue to see massive infrastructure spending, primarily in Abu Dhabi and Dubai
Global: UAE GDP growth up 3.9% in 2012, expected to be up further 3.1% in 2013

The UAE economy growth is expected to lower to 3.9% in 2012 after a solid 2011, when the GDP expanded 5.2% led by high oil prices and a 10.2% increase in oil production. Even as growth in oil sector is expected to slow down in 2012, the non-oil sector has continued its resurgence witnessing a 3.5% growth, on the strength of its services sector, manufacturing, utilities, and the recovering construction sector. The economy is expected to grow 3.1% in 2013, led by non-oil sectors that would continue to see massive infrastructure spending, primarily in Abu Dhabi and Dubai. The non-oil sector accounts for more than two-third of the overall UAE economy, the highest among GCC countries, led by the diversification drive initiated by the government. Looking forward, manufacturing, tourism & hospitality, transportation, trade, and personal services are expected to drive growth in the non-oil sector.

Non-Oil sector to play a major role in strengthening the UAE economy

Oil sector, which contributed close to a half of the UAE economy a decade earlier, has declined to less than a third in 2011. With ever increasing demand for crude oil from Asia’s top economies – India and China – UAE has increased its production and capacity over last three years and would continue to do so in the next five years. UAE aims to expand its crude oil production capacity to 3.5mn b/d by 2018.

Both trade and current surplus would remain high and stable

UAE is expected to register both trade and current surplus in 2012, driven by high oil and non-oil exports. Trade surplus is forecast to increase 14.0% to USD90.7bn in 2012, following a 9.3% hike in oil exports and an 11.7% rise in non-oil exports. Re-exports, which predominately include diamonds and jewelry, are also projected to surge 7.5% in the same period. Meanwhile, imports are expected to witness the least increase of 7.2% in 2012, with gold being the top imported commodity.

Current account surplus is expected to stay high, with an increase of 30.3% in 2012, backed by strong trade surplus. The growth in trade surplus is expected to more than offset the non-merchandise deficit, which is forecast to grow 3.8% to USD50.7bn in 2012. Current account would continue to record surplus during the forecast period till 2017, as oil exports stabilize and the increase in non-oil exports and re-exports is offset by rising imports. Trade surplus is also expected to moderate to a 2.8% growth in 2013, led by a decline in oil exports.

UAE’s status as a safe destination restored with growth in net FDI inflows

UAE attracted strong FDIs as investor confidence picked up, following the recovery in the economy. Net FDI inflows are expected to increase 3.6% to USD5.7bn in 2012, following a 57.1% increase in 2011. UAE’s status as a safe destination for investments helped attract FDI into the country, as large amounts of capital fled the crisis-hit countries in the Middle East region.

Inflation slowed down to 0.7% in 2012; to remain at 1.0% in 2013

In 2012, inflation slowed down to just 0.7% as compared to a steady 0.9% increase in the last two years, as housing markets continued to decelerate, causing property prices to continue trending downwards. The housing component in the CPI, which accounts for 40.0% of the basket, fell 2.6% in 2012 in addition to the 2.4% decline in 2011. Abu Dhabi registered 1.13% increase in CPI, while inflation in Dubai fell 1.7% in 2012. The remaining five Emirates registered above 2.5% increase in CPI. According to the Central Bank of UAE estimates, inflation is expected to accelerate to 1.0% in 2013 and range between 1.0–1.5% for the rest of the forecasted period till 2017.

Rebuilding economy through public spending on infrastructure projects  

The consolidated fiscal surplus is projected to have widened in 2012 in spite of higher capital spending by the Emirates, as revenue was bolstered by high oil prices. Consolidated capital spending is expected to increase 51.6% in 2012, while oil revenues would rise 11.6% in 2012. Consequently, fiscal surplus is expected to rise to 14.3% of the GDP in 2012 as compared to 13.2% in 2011.

Abu Dhabi is aiming to spend USD89.8bn over the next five years to construct homes, schools, roads and other vital infrastructure projects, while Dubai is considering resuming USD1.1bn worth of infrastructure projects. Abu Dhabi, which generates 90.0% of UAE’s crude oil, plans to invest around USD60.0bn over the next five years to boost oil production capacity.

Recovery of Real Estate sector holds the key to private sector lending

Following the Dubai debt crisis in 2009, the UAE central bank has focused on strengthening the banking sector and managing liquidity. With the Emirates three-month Interbank Offered Rate at 1.3% since September 2012, its lowest point in over two years, liquidity has been ample in the market. With inflation under control, the Central Bank of UAE is expected to keep interest rates low 2013 onwards, to support the lending growth in the economy.

Lending to households and government showed visible signs of improvement in the first 10 months of 2012, as personal consumption and government spending remained high. Both consumer loans and government financing grew 16.4% each in the first 10 months of 2012. Lending to transport and communications sector also rose 13.6%, as the government sough private sector partnership to implement some of the key infrastructure projects, including the expansion of airports.

Broad money supply (M3) grew 8.2% in 2012, led by double-digit growth (13.3%) in M1 as a result of strong inflow of demand deposits and over quarter percent increase in government deposits. Foreign deposits grew at faster pace (5.0% YoY), while domestic time and savings deposits registered a 3.0% YoY decline in the third quarter of 2012.

Source: Global Investment House