Banking & Business Review, UAE Digest Page 1 of 2

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OUTLOOK

Euphoria gives way to panic

The year 2008 began with a near euphoric outlook for the Middle
East and UAE markets as investors shrugged off signs of an
increasingly weakening global environment in the belief that the
local economy and markets would be shielded from any developed
market downturn. But as the year ended, the euphoria has turned to
PREVIOUS ISSUES near panic with significant questions regarding the health of the
January 2009   economy and markets leading to a dismal performance in the local
exchanges.
QUICK LINKS  
<--Please Select-->   According to an analysis by EFG-Hermes, the macroeconomic outlook for the
UAE has weakened with the marked deterioration in the global economies. Most
   ALL HEADLINES  of the global slowdown will be felt through the oil price, but will also negatively
affect key drivers of the non-oil sector including tourism, trade and the financial
* Doubts over model
* Euphoria gives way to sector.
panic  
* Car-cass of a crisis Real GDP growth is forecast to slow down to 3.1 per cent this year, from a
* Better year for stocks?
* IPO markets in doldrums
buoyant 7.5 per cent in the previous year, as net exports detracts heavily from
* Fixed or flexible:that's the growth. EFG-Hermes is  also forecasting a marked slowdown in private
question consumption growth with weaker wage increases and a slowdown in the influx of
expatriate population as the outlook of the non-oil sector weakens.
 
The solid investment levels will are expected to be the main driver of real GDP
   Subscribe ! growth in 2009. The investment program remains a key tenet of the government's
policy and is supported by its determination to ease supply bottlenecks in key
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areas, such as infrastructure and utilities. Direct government involvement in
  
investment or government sponsorship of projects also supports the outlook. Fiscal
policy will remain expansionary, focusing on capital spending. Nevertheless,
   Weekly Poll project implementation is forecast to slow with the new global reality and the
Do you think the credit crisis is tightening in liquidity.
going to last for 2 years? (Pick  
your choice before you click
vote) According to the investment bank’s analysts, despite this weakening outlook, the
UAE is in a strong position to face the challenges, given the fiscal and current
Yes
account surpluses realized over the last few years and a buildup in net foreign
No assets (NFA). Moreover, the low budget breakeven, of $44 per barrel in 2009
Maybe provides another layer of support for the economy and government spending. “We
Do not know believe that the government will use its NFA to support spending on its investment
program if the oil price averages less than $44 per barrel in 2009. We are
Vote >>
assuming an oil price forecast for Brent crude of $72 per barrel in 2009, down
from $100.2 in 2008. However, the key risk to our assumption is a lower oil price
in 2009,” they said.
 
They also seem some other positives to this new economic reality. Economic
activity will be based on more sustainable foundations and speculative activity in
the economy will fall substantially. The tighter funding conditions and new
economic reality will inevitably hit some of the regions more imaginative and
grandiose projects, which became more feasible in the first half of 2008 with the
availability of cheap financing and the soaring oil price. With the recent fall in oil
prices, the focus will again return to quality and to projects crucial to the economy,
such as those in infrastructure, they point out.
 
 The analysts feel that the sharp fall in oil price over such a short span is only one
of the factors contributing to negative investor sentiment of late. According to
them, once clarity emerges over the exact level of continuing capital expenditure,
current concerns over the fundamental impact of oil price falls will abate. EFG-
Hermes forecasts government expenditure to rise 20 per cent in 2009, compared to
25 per cent last year, with the budget surplus falling to 13.9 per cent of GDP, as
against 30.8 per cent in 2008, equivalent to $33.6 billion. This will support real

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Banking & Business Review, UAE Digest Page 2 of 2

GDP growth of 3.1 per cent over 2008-09e and 5 per cent over 2009-10. More
importantly, fiscal policy is expected to help drive non-oil GDP growth of 7.5 per
cent and 5 per cent over the same period.
 
According to the analysts, though the growth rates would be slower than those
witnessed in the recent past, these levels would nevertheless be respectable and,
more importantly, supported by fundamental expenditure rather than speculative
investment.
 
Even in the face of sustained oil prices below $44, fiscal expansion should
continue, with the UAE more than capable of allowing its budgetary position to
dip into negative or by employing surpluses it has amassed over the past few
years, they further point out.
 

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