Dubai Growth To Outpace Abu Dhabi

BMI View: Dubai will become an increasingly important growth driver in the UAE as the emirate's non-oil economy records significant growth rates. We expect the tourism, real estate and retail sectors to bolster growth as Dubai continues to bounce back strongly from the recession. Whilst the 2014 debt funding cliff will cause a temporary slowdown in the emirate's economy, the long-term picture is positive. We forecast real GDP growth of 3.8% in 2014 and 4.2% in 2015, following 4.4% in 2012.

Dubai will increasingly become the key driver of the UAE's economic growth in the coming quarters as the emirate's non-oil sector expands substantially . Indeed, while Abu Dhabi will see GDP growth constrained by moderate increases in oil output and lower oil prices, Dubai will drive the UAE's non-oil economy which will become increasingly important to the country . We forecast Dubai's real GDP growth to reach 3.8% in 2014 and 4.2% in 2015, following 4.4% in 2012. This growth will be driven by the tourism, real estate and retail markets.

Consumer and business sentiment towards Dubai has improved significantly since the start of the year, with real estate and equity markets showing the most notable signs of improvement. Dubai's DFMGI is one of the best performing equity markets in the Middle East since over the first three quarters of 2013, having posted gains of 68.2% and boding well for a positive wealth effect. Whilst there has been a pullback of late, as part of a wider move away from equities globally, we remain bullish towards the index given positive underlying fundamentals.

Almost Back In Balance
Dubai - Breakdown of Budget AEDbn

BMI View: Dubai will become an increasingly important growth driver in the UAE as the emirate's non-oil economy records significant growth rates. We expect the tourism, real estate and retail sectors to bolster growth as Dubai continues to bounce back strongly from the recession. Whilst the 2014 debt funding cliff will cause a temporary slowdown in the emirate's economy, the long-term picture is positive. We forecast real GDP growth of 3.8% in 2014 and 4.2% in 2015, following 4.4% in 2012.

Dubai will increasingly become the key driver of the UAE's economic growth in the coming quarters as the emirate's non-oil sector expands substantially . Indeed, while Abu Dhabi will see GDP growth constrained by moderate increases in oil output and lower oil prices, Dubai will drive the UAE's non-oil economy which will become increasingly important to the country . We forecast Dubai's real GDP growth to reach 3.8% in 2014 and 4.2% in 2015, following 4.4% in 2012. This growth will be driven by the tourism, real estate and retail markets.

Consumer and business sentiment towards Dubai has improved significantly since the start of the year, with real estate and equity markets showing the most notable signs of improvement. Dubai's DFMGI is one of the best performing equity markets in the Middle East since over the first three quarters of 2013, having posted gains of 68.2% and boding well for a positive wealth effect. Whilst there has been a pullback of late, as part of a wider move away from equities globally, we remain bullish towards the index given positive underlying fundamentals.

Almost Back In Balance
Dubai - Breakdown of Budget AEDbn

Real Estate: Substantial Growth Ahead

The key growth driver for Dubai will be its real estate sector, which accounts for 12.1% of the emirate's economy. Dubai's housing market has bottomed and we expect continued growth in values over the coming months. A wealth of data indicates that prices and demand are on the rise in Dubai, with the emirate's CPI data showing housing costs increased by 1.4% in July 2013, the highest level since 2009. This figure understates the real recovery as the housing survey excludes areas populated by expats. Indeed, according to the property firm Asteco, average apartment rents in Dubai rose by 20% y-o-y in Q213, while the average price of a villa in the emirate increased 17%.

As we have highlighted previously, we do not think the recent improve ments in Dubai's housing market, or the rest of the UAE , to be the making of another bubble (See 'Heading For Another Bubble?' Aug 1) . Improvements in the real estate market have been driven by an increasing population and the growing economy, rather than speculation which was the main driver in the run up to the 2008 housing crisis. In addition, the government appears to be more aware of a potential crash with the UAE Central Bank set to restrict the amount of money buyers could borrow on their home loans, at 75% for expatriates and 80% for nationals. Whilst the effectiveness of this measure is unclear given that most of Dubai's property purchases are made in cash, it shows the government is making tentative steps in the right direction, differing from its inaction in the run-up to the housing crash five years ago.

Growth Across The Board
Dubai - GDP By Output

The emirate will continue to see significant expansion in infrastructure with Dubai Municipality's 1mn sq ft. mixed-use development in the Al Qarhoud area, and a US$680mn expansion of the Madinat Jumeirah tourism zone into the Burj Al Arab area. In addition, Dubai Ruler Sheikh Mohammed bin Rashid has granted approval of the development of five new theme parks at Jebel Ali in Dubai. The development will involve total investment of AED10bn (US$2.72bn) and comprise shops and restaurants. Finally, Sheikh Mohammed announced plans for Mohammed Bin Rashid City that is designed to have the world's biggest shopping centre and 100 hotels.

Housing Sector To Drive Growth
Dubai - Value of New Housing

Tourism: Revenues Picking Up

We expect Dubai's tourism sector to continue seeing double digit growth rates as o ngoing political instability across the MENA region has greatly benefited destinations that are considered 'safe havens' for both leisure travellers and investors, such as the UAE. Dubai's international airport re ceived 6.0mn passenger s movements in August 2013, an increase of more than 1 5.0% y-o-y . Hotel occupancy rates have remained robust, averaging 88.1% in Dubai for the first six months of 2013, compared with 84.6% in the same period last year .

Tourism Growth To Continue
Dubai - Dubai International Airport, Passenger Arrivals (LHS) and Cargo Volumes (RHS)

Given the UAE's relatively stable political risk profile and its strategic position between Europe and Asia, the federation will continue to attract significant inflows of visitors. In particular, the development of large-scale projects, such as a US$600bn theme park called Dubai Adventure Studio and the Dubai Art Museum will ensure that leisure tourism increases at a rapid clip.

Nearing Capacity
Dubai - Hotel Occupancy & Rates

Re-Exports & Funding Cliff To Drag On Growth

One area which we remain bearish towards is Dubai's substantial re-export sector, which accounted for 8% of the emirate's economy in 2012. The sector has been substantially hit by sanctions against Iran, which was the destination for 31% of the emirate's re-exports. Ahmed Butti Ahmed, Director General of Dubai Customs, stated that two-way trade between Dubai and Iran was approximately AED12.1bn (US$3 . 4 bn) in H113 , a decline of approximately 3 0.1 % y-o-y. While there have been tentative steps in rapprochement between the US and Iran, we do not expect sanctions to be lifted anytime soon, thus keeping the re-export sector subdued. If we were to see significant positive steps in the coming months, Dubai could experience a significant growth dividend, however, that does not look likely to occur for the foreseeable future.

Another cause for concern is the debt funding cliff in 2014. We believe Dubai will seek to rein in total spending over the coming quarters, given ongoing uncertainty over the potential for future debt restructurings of several government related entities. Indeed, we forecast Dubai's growth in late-2013 and 2014 will be tempered by deleveraging a head of the 2014 funding cliff , with estimates by the IMF showing approximately US$30bn in liabilities set to mature in the emirate . As the experience of the past several years has shown, the local banking sector has borne the brunt of debt restructurings (while bondholders have been repaid in full), which is a policy we do not expect to end as the funding cliff approaches. Given the importance of the financial sector in Dubai, we forecast a slight dip in growth in 2014 of 3.8% (from 4.7% in 2013).

UAE - Fiscal Data (AEDbn)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: BMI, Dubai Statistics
Total Revenue 9.1 10.0 12.0 16.9 19.8 25.6 32.6 40.6 40.9 42.6 34.3
Tax Revenue 1.4 1.9 2.4 3.3 4.6 6.8 7.6 7.1 7.1 8.0 8.4
Customs 1.1 1.6 2.1 2.9 3.5 6.0 6.4 5.8 5.9 6.9 7.0
Income Tax 0.2 0.3 0.3 0.4 1.1 0.8 1.2 1.3 1.1 1.1 1.3
Nontax Revenue 7.6 8.0 9.6 13.6 15.2 18.8 25.0 33.4 33.8 34.6 26.0
Oil and Gas 3.7 3.7 4.2 5.9 6.3 6.8 8.5 4.7 5.0 5.5 5.6
Enterprise Profits 1.2 1.1 1.3 1.9 2.8 1.5 1.8 0.8 1.9 1.4 1.3
Transfers from Abu Dhabi 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.1 11.0 9.9 0.0
Other 2.7 3.1 4.0 5.7 6.1 10.5 14.7 15.8 15.9 17.9 19.1
Total Expenditure 9.4 10.7 10.5 12.4 17.3 26.5 38.1 90.2 49.1 42.0 38.1
Current 6.1 6.6 7.8 8.5 14.0 16.4 22.6 26.7 25.0 26.4 27.9
Wages and Salaries 2.9 3.0 3.4 3.9 5.1 5.9 8.2 10.4 10.9 11.2 11.7
Goods and Services 1.9 1.7 2.4 2.2 1.9 4.0 5.1 6.7 6.6 7.2 7.9
Subsidies and Transfers 0.8 1.0 1.2 1.5 6.4 5.2 7.6 5.8 5.4 5.7 6.4
Interest Payments 0.0 0.0 0.3 0.2 0.0 0.0 0.1 1.1 1.2 1.3 1.4
Other 0.3 0.8 0.5 0.7 0.6 1.3 1.6 2.7 1.0 1.0 0.6
Development 2.0 2.8 1.5 2.7 2.1 8.9 14.3 13.5 8.9 7.1 5.7
Loans and Equity (net) 0.1 0.0 0.0 0.0 0.0 0.0 0.0 48.9 14.7 7.0 2.9
Contribution to Federal Government 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 0.6 1.5 1.5
Overall Balance -0.3 -0.7 1.4 4.5 2.5 -0.9 -5.5 -49.7 -8.2 0.6 -3.8
Dubai - GDP Forecast
2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Source: BMI, Dubai Statistics
Constant GDP AEDbn (2006=100) 241.1 283.1 293.1 285.2 295.3 305.0 318.4 333.3 334.7 348.7 362.3 375.4
Real Growth % chg 11.2 17.5 3.5 -2.7 3.5 3.3 4.4 4.7 3.8 4.2 3.9 3.6
Current GDP AEDbn 223.3 310.1 342.9 294.2 304.6 315.4 361.0 392.1 424.6 462.0 500.3 543.3
Current GDP USDbn 60.9 84.5 93.4 80.2 83.0 85.9 98.4 106.8 115.7 125.9 136.3 148.0
Nominal Growth % chg 22.1 38.8 10.6 -14.2 3.5 3.5 14.5 8.6 8.3 8.8 8.3 8.6

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Sector: Country Risk
Geography: United Arab Emirates
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