A determined optimism is pervading Dubai’s markets, with the emirate’s growth set to top many expectations this year. Few would suggest, however, that the emirate is immune from the looming debt crisis in Europe. In mid-May, Dubai’s Economic Council issued its latest forecast for the emirate’s economy, estimating that GDP would grow by 4-5%, well up on the 3% for 2011 and double projections of some international agencies. According to the council’s chief economist, Ali Tawfiq Al Sadeq, GDP expansion will be driven by broad-based growth, rather than by one or two individual sectors.
“Growth this year will be supported by expansion in overall economic activities and strong performance of key sectors was shown in the first quarter of 2012,” Al Sadeq said in an interview with Arabic-language daily Alittihad.
Dubai’s strong trade, tourism and industrial sectors were expected to be among the leaders in economic growth this year, Al Sadeq said, adding that there would be increased opportunities for investors throughout 2012.
It seems local companies share Al Sadeq’s optimism, with recent data issued by the Department of Economic Development (DED) showing strong positive sentiment among the emirate’s business community. According to the results of the DED’s latest survey, released on May 8, Dubai’s Business Confidence Index (BCI) stood at 120.5 points at the end of March, suggesting most businesses have high expectations for the year, with any score over 100 indicating a positive outlook.
The survey found that 50% of firms canvassed expected higher sales revenue in the second quarter, with a further 35% believing earnings will remain steady.
“The survey also reveals an even brighter outlook among export-related businesses, rising confidence among small and medium-sized enterprises and a stronger investment focus on upgrading technology,” the report said.
A key factor to recent confidence is the government’s success in dealing with its own debt. In a statement issued in late April, the government said it had lowered state debt, excluding that of state-owned companies and other liabilities, by 1.6% between May 2011 and March 2012 and reduced its debt to 11.6% of Dubai’s 2010 GDP.
In addition to debt reduction, the government is reforming many government-related entities (GREs), which has won the approval of ratings agencies and lenders. Having racked up substantial debts during the double-digit growth period leading up to the 2008 global economic crisis, a number of Dubai’s GREs were caught overextended when the downturn hit.
In the following years, Dubai has made significant progress restructuring its GREs, said Tommy Trask, a credit analyst with ratings agency Standard and Poor’s.
“In regard to Dubai-based issuers we consider to be GREs under our methodology, we believe the government has a clearer strategy and greater confidence as to which GREs it should support with public funds,” Trask said during the launch of a report on the credit ratings outlook for Gulf states and other countries in the Middle and North Africa on May 7.
There has been an increase in market confidence in the Dubai government’s ability to support the GREs that may require state backing, Trask said, though the likelihood of this is receding.
The market’s faith in the government was underscored in late April, when Dubai floated two sharia-compliant bond issues. The first, a five-year bond worth $600m, will yield 4.9%, while the second, a 10-year bond, is worth $650m and offers a yield of 6.45%. Interest in the issue was strong, with a total of $4.5bn worth of bids submitted. The government said the funds raised would be used for general budgetary purposes and refinancing.
According to Abdul Rahman Al Saleh, the director general of Dubai’s Department of Finance, both the level of interest and the attractive pricing of the sukuks were indications of rising investor confidence in Dubai’s economy.
“Investors were happy with the steps taken by the government over the last three years to counter the impact of the financial crisis and prudent measures used to control costs and manage its budget deficit,” Al Saleh said.
While confidence in in the emirate’s recovery is growing, should the debt crisis in Europe spread to the global economy, or India and China’s expansion begin to slow, Dubai’s own economy could suffer. However, though a return to global economic stagnation would indeed impact Dubai, its restructuring efforts and reduction of low-return assets make the emirate much better equipped to face any new downturn with confidence.
Oxford Business Group