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Euphoria gives way to panic

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   ALL HEADLINES  * Doubts over model * Euphoria gives way to panic * Car-cass of a crisis * Better year for stocks? * IPO markets in doldrums * Fixed or flexible:that's the question

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 near panic with significant questions regarding the health of the economy and markets leading to a dismal performance in the local exchanges.   According to an analysis by EFG-Hermes, the macroeconomic outlook for the UAE has weakened with the marked deterioration in the global economies. Most 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 sector.

  Real GDP growth is forecast to slow down to 3.1 per cent this year, from a buoyant 7.5 per cent in the previous year, as net exports detracts heavily from growth. EFG-Hermes is  also forecasting a marked slowdown in private consumption growth with weaker wage increases and a slowdown in the influx of expatriate population as the outlook of the non-oil sector weakens.

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The solid investment levels will are expected to be the main driver of real GDP 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 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, project implementation is forecast to slow with the new global reality and the tightening in liquidity.

  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 account surpluses realized over the last few years and a buildup in net foreign assets (NFA). Moreover, the low budget breakeven, of $44 per barrel in 2009 provides another layer of support for the economy and government spending. “We 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 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. EFGHermes 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

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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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3/6/2009