Dubai’s economic growth is expected to pick up, averaging about 2.5 percent annually over 2019-2022, supported by increased economic activity associated with Expo 2020 and, after that, by traditional growth engines such as trade and transportation, said S&P Global Ratings in a new report.
Support for the economic growth will come largely from the construction and real estate sectors, added the new RatingsDirect report titled “What is our credit view of Dubai?”.
S&P expects the completion of Expo 2020-related infrastructure projects and additional residential housing supply to enter the market from existing projects this year. A boost to tourism and related spending linked to Expo 2020 should drive somewhat stronger growth in 2020.
However, after the Expo, economic growth will likely to ease to around 2 percent through 2022, sustained by traditional growth engines such as trade and transportation, the report said.
Downside risks to growth have risen from trade and the real estate sector. Overall, Dubai’s economy grew by just under 2 percent in 2018, the slowest expansion since 2010, according to the report.
“In our view, relatively low oil prices, accompanied by slower regional demand and rising protectionism in the US and China, could further slow Dubai’s transshipment trade flows, which have been sluggish since 2016,” the report said.
S&P Global Ratings expects real estate prices in Dubai to fall by another 5 per cent-10 percent in 2019. However, a longer and deeper downturn in the real estate market than currently anticipated could significantly dampen economic activity and increase pressure on government finances.
About 70 percent of Dubai’s government revenues are from nontax sources, with part coming from land transfer and mortgage registration fees, housing and municipality fees, alongside real estate-related income in the form of dividends from the key developers it controls such as Emaar Properties PJSC and Nakheel Properties.
“Although we expect demand created by Expo 2020 to ease the pressures temporarily, Dubai’s commercial real estate might suffer from oversupply afterward, further reducing the financial cushion of real estate developers,” S&P Global Ratings said in the report.
New economic stimulus plans to promote small and midsize enterprises and public-private partnerships, announced recently by the government, could gradually increase Dubai’s long-term growth potential. A new law to allow full foreign ownership of companies outside existing free economic zones should also encourage private investment and improve the business climate, the report said.
The performance of Dubai’s economy and its role as a regional trade hub is important for the UAE federation as a whole. Dubai contributes a significant amount to the nonhydrocarbon sector of the UAE, which represents about 70 percent of UAE real GDP.
“According to our estimates, Dubai’s external trade accounts for about 72 percent of the UAE’s total non-oil trade. We expect the UAE’s economy will continue to face challenges in the medium term partly because of softer growth momentum in Dubai,” the report said.
The UAE’s economic growth will pick up to 2.6 percent by 2020 from 1.7 percent in 2018 in part due to increased economic activity associated with the Expo.
“Despite our base case scenario that the real estate downturn will continue in Dubai in 2019, we believe that UAE banks will be more resilient than in the last real estate cycle in 2002-2008, due to stronger regulation and more conservative lending to real estate developers and mortgagors,” the RatingsDirect report said.
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