Barclays Capital picks Dubai as the best risk/reward play in the region. But while the outlook is optimistic, corporates will continue to feel the pain
UAE economic growth forecast for the year seems to be revised upwards on a weekly basis. Days after the International Monetary Fund (IMF) said the UAE will manage a 2-3% growth, the UAE Minister of Economy suggested that it expects 3-4% GDP growth this year.
Now Barclays Capital expects the UAE to post a robust 4.5% growth in 2012 as the emirate's oil production ramps up. Overall, BarCap expects the GCC to post 5.4% growth.
In Dubai, the Chairman Shaikh Ahmed bin Saeed al Maktoum of the Supreme Fiscal Policy Committee recently predicted growth of 5% this year for the emirate in a sharp acceleration from just over 3% in 2011.
"The continued upward trajectory of oil prices should also bolster the fiscal and current account balances of GCC countries, although to different extents," said Fahad Al Turki, a BarCap analyst in a note on emerging markets.
"In Saudi Arabia, Kuwait and the UAE, we expect larger fiscal surpluses and greater accumulation of reserves. As such, for the GCC as a whole, we raise our forecasts of fiscal and current account surpluses to 13% and 22.2% of GDP in 2012, respectively, from 11% and 21.6% of GDP in 2011."
The bank expects growth remains supported by ongoing expansionary fiscal policies. Saudi Arabia is expected to raise spending 2.4% in 2012 on top of a 23% increase last year, while BarCap expects Qatar and Kuwait to increase spending in their prospective FY12/13 budgets soon to be approved.
Higher allocations to current spending, notably on wages such as those recently announced in the UAE and Kuwait, will boost domestic demand and non-hydrocarbon growth.
"In fact, the latter reached a near-record high in Saudi Arabia in 2011, and we expect it to remain elevated this year. Similar trends are expected in Kuwait and Oman, where fiscal spending has been on the rise," wrote Al Turki.
"In Bahrain, however, growth dropped to 2.2% year-on-year in 2011, with non-hydrocarbon growth decelerating sharply from 4.9% year-on-year in 2010 to 2.1% year-on-year, because of political tension, which is likely to keep growth subdued in 2012, in our opinion."
DUBAI OPTIMISM
NCB Capital's head of research Said A. Al Shaikh, says that while Dubai was seen as one of the most vulnerable regional economies until recently, the outlook is showing increasingly consistent signs of improvement in spite of continued weakness in the real estate sector.
"Perceived credit risks have fallen to a seven-month with the cost of benchmark credit default swaps dropping by almost a quarter this year. Following an estimate 3.3% growth in the UAE as a whole in 2011, Dubai is thought to be on track for the fastest rate of expansion since 2007."
This economic stabilization is expected significantly reduce the probability of defaults or large-scale debt restructurings. At the same time, progress is being made in addressing the most obvious vulnerabilities in terms of pending maturities. The growing market optimism received a significant boost from the decision last month by Dubai Holding to repay a USD500 million bond.
"Dubai Holding has been widely viewed as one of the more vulnerable Dubai government-related corporate entities. Another perceived 'weak link,' DIFC Investment, is reportedly seeking a USD1bn loan to repay a USD1.25 bn five-year Sukuk due in June," wrote Shaikh in a report.
"Local banks are expected to be the main source of funding. The company repaid a USD200 million n revolving credit facility in December but faces major cash flow challenges."
In fact, BarCap says Dubai offers the best risk/reward in the region at present.
"While the upcoming Jebel Ali Free Zone (JAFZ) and Dubai International Financial Centre (DIFC) bond maturities (in June and November, respectively) will be important milestones for investor sentiment towards Dubai, we think that Dubai Inc's debt restructuring has progressed well, addressing short- to medium-term (until 2014) liquidity and debt refinancing problems so far, despite a challenging debt maturity profile in the long term."
In addition, the sovereign's withdrawal of support for non-core businesses has reduced contingent liabilities and should be seen as a positive for Dubai's sovereign credit profile, in our view. Hence, we think Dubai sovereign spreads offer catch-up potential and are likely to attract off-benchmark investor interest in the current environment.
"We highlight the Dubai Government Bond (DUGB) 2020s and Dubai Electricity and Water Authority (DEWA) 2020s as our favourite instruments to express our constructive view," says BarCap's Al Turki.
Dubai GREs owe US$15bn in debt falling due in 2012, and most analyst feel it's a debt pile that the emirate can manage.
"We expect a large part of this debt to be refinanced, although the crisis in the EU may make it more difficult for GREs to raise new debt," warns the Economist Intelligence Unit.
IMF UNIMPRESSED
Interestingly, the IMF is not as exuberant about the UAE's growth, although it does highlight that real non-oil GDP will grow 3.5% this year, outpacing the overall economy, which will grow a paltry 2.3%.
In fact, it continues to warn the authorities of the debt risk from government-related entities (GREs).
"The current uncertain global economic and financial environment poses a number of risks to this outlook," said the IMF. "The weak growth prospects in the advanced economies could lead to a pronounced decline in oil prices if regional geopolitical risks subside. Moreover, a renewed worsening of global financing conditions could make it more difficult to roll over some of the GREs' maturing external debt and affect liquidity conditions in the banking system."
While the IMF says there is limited potential for further increases in UAE's oil production in the near term, it has probably not taken into account a spike in oil prices.
Christine Lagarde, the IMF director-general said Tuesday that the loss of Iranian supplies could raise oil prices by 20 to 30% from their current level of USD124.35 per barrel at close Tuesday. That could take oil prices to over USD161 per barrel, much higher than the record USD147 just before the 2008 global financial crisis.
RESOLVING TROUBLED COMPANIES
The decision by Aldar Properties and Sorouh Properties to explore a merger suggests that the government - which has a significant stake in both companies - is keen on resolving the capital's real estate troubles.
"Given the current status of both companies and the real estate market of Abu Dhabi, we believe the merger offers a mixed bag for the several involved stakeholders," says Global Investment House in a note.
"Operationally, the positives materialize for the two companies as they continue to suffer from deteriorating market conditions. The merger in a plain form would increase the combined landbank of the new entity, create significant synergies and eliminate material competition, which should lend some support to the deteriorating margins that both companies are suffering from," said Global.
In Dubai, the government has reduced Islamic home lender Amlak Finance debt by USD1.1-billion, as it readies the company to resume leading mortgages in the property sector.
WHAT COULD GO WRONG?
Dubai will be hurt by lack of opportunities to trade with Iran and the ability of Iran-based investors to buy property and vacation in the emirate, as international sanctions restrict movement in the Islamic Republic.
Trade between the emirate and Tehran is around USD13-billion, but the latest U.S. sanctions which extends to SWIFT transactions cut off yet another trade avenue between the two.
"Such a disruption in the financial transfers has had a large impact on the (U.A.E.) commercial sector and there has been injustice inflicted on some of the traders in this regard," U.A.E. economy minister Sultan Al Mansouri told Zawya Dow Jones.
Of course, an Israeli attack on Iran could disrupt the buoyant business sentiment and send investors running for cover in the non-oil sector, even if it means high oil prices - and revenues for the UAE and other Gulf economies.
Even without Iran there is plenty of pain for Gulf corporations. A report by McGill Consulting Group showed that 34% of the UAE companies surveyed were going to cut 11-20% of their annual budgets, second only to corporations based in troubled Bahrain.
UAE firms are also more likely to cut staff than their Saudi and Qatari counterparts, according to McGill.
CONCLUSION
The most heartening aspect of the UAE recovery is the painful but necessary cuts.
Recent announcements at the federal and emirate levels indicate an overall increase in consolidated public spending. On the one hand, the UAE government announced increases in wages (varying between 35% and 100% for federal employees) and pensions, as well as an AED10bn fund to support debt servicing of low-income citizens.
But the Abu Dhabi Executive Council also approved an investment strategy with spending plans encompassing the Khalifa Port, several museums, the development of the Khalifa Industrial Zone, and other social development projects that await implementation.
"In Dubai, however, the government renewed its commitment to fiscal consolidation," says BarCap. "It reduced spending by 4.4% compared with the 2011 budget, but maintained infrastructure spending at 41% of total spending, while social development received 29%. While the above measures should keep investment and consumption growing, growth may moderate, as banks' credit to individuals is not likely to pick up sharply given the new regulatory limits imposed on personal loan financing."
It appears that the IMF prognosis appears to understate the UAE's economic health. With the stockmarket also rebounding nicely, the UAE business mood remains upbeat as investors and businesses hope for good times to return.
© alifarabia.com 2012
