Abu Dhabi growth to slide below Dubai-report

19 July 2016

Report expects 2 percent growth in Abu Dhabi, while Dubai is forecast to see stronger growth of 3.5 percent this year

The economy of the United Arab Emirates (UAE) is "cruising along" while others in the region struggle to maintain growth, but Dubai is growing at a faster rate than Abu Dhabi amid the new reality of low oil prices, according to Standard Chartered Bank.

"Non-oil economic activity in the UAE has surpassed expectations for now, although it remains subject to downside risks amid government spending cuts and an expensive currency," the bank said. With the UAE dirham has been pegged to the US dollar since 1997, any global currency movements will impact how attractive the UAE market is to overseas investors, tourists and expats.

Economic activity in the UAE remains robust despite low crude oil price and a number geopolitical crisis unfolding across the Middle East and globally, according to the latest purchasing manager's index compiled by consultancy firm Markit, which tracks business sentiment across the world.

Led by improving activity in travel and tourism and wholesale and retail sectors, business conditions pointed to a 10-month high across the Dubai private sector in June, the Markit research found.

"The improvement in the Dubai Economy Tracker index in June is underpinned by strong growth in new orders and output," said Khatija Haque, head of Middle East and North Africa research at Dubai bank Emirates NBD, which sponsors the Markit survey.

Abu Dhabi feels heat

While Dubai is upbeat, further south its oil-rich counterpart is feeling the heat of a global economic slowdown. Abu Dhabi's Department of Economic Development (DED) survey showed consumer confidence in Abu Dhabi fell 1.6 percent in the first quarter of 2016, compared to same period last year of 2015, mainly due to lower oil prices and softer global economic growth.

Clearly, Abu Dhabi is still smarting from an oil price downturn which continues to keep prices around $50 per barrel, around half the levels enjoyed by oil exporters in the first four years of the current decade.

"Growth in Abu Dhabi surprised on the upside last year, at 6.3 percent according to preliminary data," Standard Chartered Bank's head of economic research, Dima Jardaneh, said in the report.

"We expect much lower growth in the emirate this year, at 2 percent, reflecting the full-year effect of the government's consolidation efforts in non-oil sectors including financial services and construction. We expect growth in Dubai to reach 3.5 percent this year."

Still, it will be lower than the 4.1 percent growth in gross domestic product (GDP) posted by the emirate last year, according to Dubai Statistics Centre.

Dubai also benefits from the fact its economy is heavily diversified and, unlike Abu Dhabi, it is not dependent on hydrocarbons. The oil sector, along with mining and quarrying, accounted for just 2.2 percent of Dubai economy last year, according to a report by Abu Dhabi-based The National newspaper. By comparison, oil accounts for half of Abu Dhabi's economy, although it is aiming to reduce this to around a third by 2030.

Ratings agencies have spared the UAE a downgrade, even as they lowered ratings of its other Gulf counterparts in recent months. S&P Global said it is maintaining Abu Dhabi's long-term debt rating at AA in February, while Moody's affirmed their Aa2 rating in May.

Dubai tourism resilient

Economic growth will likely be led by Dubai's tourism sector, which remains resilient. The emirate saw 4.1 million visitors in the first quarter, while passenger numbers at Dubai International Airport surged 7.2 percent year-on-year in May to 6.7 million.

"Tourism will again be among the stronger-performing sectors," said Berna Bayazitoglu, an analyst at Credit Suisse. But "tourism remains vulnerable to weaker external demand, with continuing economic troubles in Russia and regional instability".

While construction and real estate have visibly slowed down, Standard Chartered expects the sector to avoid a "sharp correction".

According to real estate information provider REIDIN, Dubai's residential sale prices declined 10 percent year-on-year for apartments and 11 percent year-on-year for villas in the first quarter.

The Dubai real estate could also suffer after the United Kingdom's decision to leave the European Union, which has taken a massive toll on the British currency.

UK citizens are among the top five buyers in the Dubai property market and similar to the scenario played out during the devaluation of the Russian ruble, a fall in the value of UK pound will adversely affect the demand of Dubai property from UK nationals, according to Kuwait Finance Centre, or Markaz.

"Additionally, the weaker currency is expected to adversely impact tourism as well given that British and European nationals are one of the top tourist (segments) in Dubai," Markaz said in a report.

Reforms take hold

Despite their enviable position compared to the other countries in the region, the UAE authorities are being prudent and have unveiled a series of reforms to address the lower-for-longer crude oil price environment.

"The government has favoured front-loading fiscal adjustment," Standard Chartered said, noting that Abu Dhabi cut expenditure by 20 percent last year after hydrocarbon revenues declined 46 percent last year.

The authorities are also keen to introduce a value-added tax in 2018, which should diversify the economy's revenue base away from hydrocarbon revenues.

"Abu Dhabi government targets a further 17 percent cut in spending this year and expects a deficit of $10 billion, based on an oil price of $40 per barrel. Financing the deficit will rely in part on the proceeds of the recent $5 billion Eurobond issuance," Jardaneh said in the report.

"We raise our 2016 fiscal deficit estimate for the UAE to 4.7 percent of GDP (4.4 percent prior) to reflect lower oil and non-oil revenues."

The impact of an ongoing deficit will likely be felt further afield. The UAE consists of seven emirates and oil-rich Abu Dhabi contributing 86 percent to the country's federal budget, according to a report by Reuters. As it stands, the state news agency WAM reported in October 2015 the UAE cabinet approved a slightly smaller federal budget of 48.56 billion dirhams ($13.2 billion) for 2016, after several straight years of rises.

As the region's third largest economy, after Saudi Arabia and Iran, adjusts to this new economic reality, it will be interesting to see how oil-rich Abu Dhabi and tourism-focused Dubai react to the different challenges they face going forward.