UAE ECONOMIC REPORT docx

1 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 TABLE OF CONTENTS CONTACTS Research Marwan S. Barakat (961-1) 977409 marwan.barakat@banqueaudi.com Jamil H. Naayem (961-1) 977406 jamil.naayem@banqueaudi.com Salma Saad Baba (961-1) 977346 salma.baba@banqueaudi.com Fadi A. Kanso (961-1) 977470 fadi.kanso@banqueaudi.com Nathalie F. Ghorayeb (961-1) 964047 nathalie.ghorayeb@banqueaudi.com Sarah F. Borgi (961-1) 964763 sarah.borgi@banqueaudi.com Executive Summary 1 Introduction 2 Economic Conditions 3 Real Sector 3 External Sector 8 Public Sector 9 Financial Sector 10 Concluding Remarks 18 The UAE Economic Report can be accessed via internet at the following web address: http://www.banqueaudi.com UAE ECONOMIC REPORT SUSTAINED RECOVERY PROSPECTS DESPITE LINGERING CHALLENGES • Steady though somehow slow recovery in the Emirates economy Amidst an uncertain global economic environment, the UAE economy showed relative signs of resilience, with the IMF estimating growth at 4.0% in 2012. Higher crude supply and oil prices provided a timely boost to public revenues amid rapid expansion. The recovery of the non-hydrocarbon economy continued over the past year, backed by strong trade, tourism, logistics and manufacturing at large. The UAE has been accordingly reaping the benefits of its early efforts to diversify its domestic economy. • Fiscal accounts on a consolidation stance The UAE entered a phase of fiscal adjustment which aims at unwinding the stimulus seen during recent years and lowering the high breakeven oil prices without hindering economic recovery. Indeed, the growth in public expenditures as well as that of public revenues retreated in 2012 as the UAE takes a breather from the 2011 oil markets boom as well as the massive counter cyclical policy it had embarked on to avoid potential spillovers from conflict-stricken countries. As a result of growth in revenues outpacing that of spending, the UAE general government fiscal accounts are set to sustain a high surplus of circa 12.0% of the 2012 GDP for the third consecutive year, compared to 11.2% in 2011 and 4.3% in 2010. • Subdued inflation amidst a moderate growth in money supply Monetary conditions in the United Arab Emirates in 2012 were marked by a sustained growth in the Central Bank’s foreign assets amid rising oil prices, a moderate expansion in money supply and subdued inflation rate due to declines in housing rents. The CPI rose by 0.7% during the first ten months of 2012 as compared to the corresponding period of the previous year. The narrow measure of Money Supply (M1) widened by 7.9% to reach US$ 77.6 billion at end-August 2012. The Central Bank’s foreign assets rose from US$ 46.1 billion at end-2011 to US$ 51.5 billion at end-August 2012, on the back of rising oil prices and a corollary growth in held-to-maturity foreign securities. • Satisfactory banking growth though asset quality challenges persist The United Arab Emirates’ banking sector registered an overall satisfactory activity so far in 2012 amid broadly positive macroeconomic performances in a still challenging global backdrop. Measured by banks’ aggregated assets, banking activity grew by 6.1% over the first ten months of 2012, against a 4.0% growth registered during 2011’s similar period. The sector yet continues to face pressures on asset quality metrics, with the latest available IMF statistics placing non-performing loans of national UAE banks at a new high of 7.6% of total loans at end-March 2012, slightly exceeding regional and international benchmarks. • Rally in prices on equity and fixed income markets The UAE equity markets benefited from improved investor sentiment in 2012 after Dubai started to show early signs of recovery. The Dubai Financial Market index rose by 18.8% in the first 11 months of 2011 and the Abu Dhabi Securities Exchange reported a rise in prices of 11.3% over the same period. In parallel, fixed income markets captured investors’ interest following early debt redemptions, timely debt repayment and orderly loan restructuring, with Dubai reporting significant improvement in its risk perception. Dubai’s five-year CDS spreads contracted by 215 bps to reach 230 bps, the highest contraction in CDS spreads across the MENA region in 2012. • Near term economic outlook favorable on the overall Driven by a number of macro pillars, namely trade, logistics, tourism and services, real GDP growth is forecasted at 2.5% by the IMF for 2013 within the context of a slow global recovery, while inflation is expected to relatively pick up to 1.6% as rents begin to recover and a cap on food prices is lifted. The crisis hit property and financial sectors should recover further in the year to come and looser fiscal policy will also help the economy on the overall, but the outlook for growth would remain limited by oil price forecasts in the event of a persistently sluggish global recovery. Bank Audi sal - Audi Saradar Group - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: research@banqueaudi.com 2 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 Amidst an uncertain global economic environment, recent economic conditions in the Emirates continue to point to the resilience of the UAE economy which the IMF estimated to have grown by 4.0% in 2012. Higher crude supply and oil prices provided a timely boost to public revenues amid rapid expansion. The recovery of the non-hydrocarbon economy continued over the past year, backed by strong trade, tourism, logistics and manufacturing at large. The UAE has been accordingly reaping the benets of its early eorts to diversify its domestic economy. Most economic indicators actually point to a steady but slow recovery in the Emirates post-2011. Dubai has somehow beneted from the regional turmoil by attracting diverted capital and tourism inows. For instance, the ow of passengers through Dubai airport grew by 13% over the rst nine months of 2012, while the size of real estate transactions has been recovering steadily year after year and has mushroomed since the beginning of the current year. With many companies targeting Dubai primarily to do business with other parts of the region, high oil prices and domestic economic priorities have meant strong regional investment and growth, attracting foreign business, much of which bases itself in Dubai. The economy went back to basics while the trade sector is beneting from regional spending at large. At the monetary level, the annual ination in the Emirates slowed to 0.7% in 2012 as estimated by the IMF. Rising food, hotel and restaurant and education costs are the main source of ination, while the main source of deationary pressure continues to be falling rents, housing and utility costs. An accommodative monetary stance under the peg to the USD is serving the UAE well, as the country is still struggling to deal with the balance sheet problems caused by the public sector. Despite an expansionary scal stance, the public nance and current account balances remain in surplus of 12.0% of GDP and 9.3% of GDP respectively in 2012 according to the IMF as a result of increasing oil prices and production. While leverage remains an overhang for Dubai, the large net foreign assets of the UAE, projected by the IIF at US$ 433 billion by end-2012, equivalent to 120% of GDP, provide the Emirates with a nancial cushion to smooth out a possibly adverse eect if oil prices were to decline sharply. At the banking level, activity growth was sound in 2012 while maintaining satisfactory nancial soundness indicators. The growth in total assets by US$ 27.4 billion over the rst ten months to reach US$ 480.0 billion in October 2012 was 56% higher than the growth reported over the same period of 2011 (US$ 17.6 billion). Despite satisfactory liquidity levels, credit in particular is only slowly picking up following new stricter regulatory measures as well as additional provisions for non-performing loans, as excess capacity in the real estate sector and the debt overhang still limit lending opportunities. The banking sector yet maintains signicant buers to withstand a deterioration in asset quality and external liquidity conditions. The in-depth developments in the real sector, external sector, public sector and nancial sector of the economy are detailed in the forthcoming sections. The concluding remarks are left to the outlook of the UAE economy on the back of positive and negative risk drivers looking ahead. Sources: IMF, Bank Audi’s Group Research Department Sources: UAE Ministry of Economy, Bank Audi’s Group Research Department UAE ECONOMIC PERFORMANCE GDP BREAKDOWN BY ECONOMIC ACTIVITY* 3 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 1. ECONOMIC CONDITIONS 1.1. REAL SECTOR Continued recovery despite slower paces in some sectors 1.1.1. Hydrocarbons Sector UAE’s hydrocarbons market seems to be taking some respite after the drastic upward trajectory reported by prices and production in response to the supply disruption in some regional conict stricken oil producing countries. As a matter of fact, average oil prices were up by 2.0% year-on-year during the rst eleven months of 2012 while output is set to remain almost constant at circa 2.6 millions barrels per day in 2012, as per the IMF. Subsequently, the real hydrocarbon growth would be at in 2012, slowing down signicantly from the 9.2% growth posted in 2011, as per the same source. The hydrocarbons sector, accounting for close to 40% of GDP, is still deemed of a core importance to the Emirates’ economy. As a matter of fact, revenues from the sector in 2012 would contribute to nearly 82% of those of the scal accounts and almost 40% of those stemming from exports. Within this context, local entities in charge of hydrocarbons projects embarked on a sharp increase in activity in the second half of 2012 subsequent to an 18-month slump with Abu Dhabi leading resurgence in contract awards. Based on schedules, clients in Abu Dhabi awarded nearly US$ 9 billion worth of EPC contracts in the second half of 2012, more than the previous three halves. In the rst half of 2012, the UAE witnessed only three major awards, which makes it easily the quietest period for contracts in recent years. The rst ve months were eclipsed by the huge US$ 2.5 billion package awarded to South Korea’s Samsung Engineering in June to develop a carbon black plant and delayed coker unit in Ruwais, Abu Dhabi. The award, by Abu Dhabi Rening Company (Takreer), was the single biggest award in the UAE hydrocarbons sector for over two years since Abu Dhabi Polymers Company (Borouge) awarded a US$ 3 billion contract for its Ruwais polymers expansion in April 2010. CRUDE OIL & NATURAL GAS PRICES Sources: Bloomberg, IMF, EIU, Bank Audi’s Group Research Department OIL & GAS PRODUCTION Sources: Bloomberg, IMF, EIU, Bank Audi’s Group Research Department 4 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 During the second half of 2012, project awards were dominated by UAE’s two major oshore operators, Abu Dhabi Marine Operating Company (Adma-Opco) and Zakum Development Company (Zadco). The latter started the second half with the US$ 800 million EPC1 award for the construction of oshore early production facilities on its Upper Zakum eld to the local National Petroleum Construction Company and France’s Technip. The larger EPC2 oshore section, estimated in a range of US$ 2 billion to US$ 4 billion, is yet to be awarded. Also, Adma-Opco is set to award four major oil and gas packages on its Satah al- Rasboot (Sarb) and Umm al-Lulu oshore full-eld developments in a package valued at nearly US$ 1.95 billion. Elsewhere, Abu Dhabi Gas Industries (Gasco) awarded an estimated US$ 450 million EPC contract to develop a pipeline from its gas processing hub in Habshan to industries in Taweelah. In parallel, Abu Dhabi started exporting its rst crude from a pipeline that bypasses the Strait of Hormuz, shipping the fuel from the neighbouring Emirate of Fujairah to a renery in Pakistan. In fact, threats to close the Strait prompted authorities to come up with a contingency plan to plug any supply shortages, chiey to its Asian partners, through the construction of the US$ 4.2 billion pipeline owned by International Petroleum Investment Company. The year to come is set to be a relatively busy period for the sector as Abu Dhabi, which contains most of the hydrocarbons activity, aims to enhance its production to 3.5 million barrels per day by 2018. Yet, the over-reliance on hydrocarbons, mainly crude oil, puts the UAE in a relatively vulnerable position to potential uctuations in oil prices and therefore global demand. Consequently, the government embarked on energy diversication eorts, as outlined in the Abu Dhabi 2030 vision. Indeed, the Federal Authority for Nuclear Regulation granted a permit to build the country’s rst nuclear reactors. Four new nuclear reactors are planned at a cost of US$ 20 billion, with an output of 1,400 megawatts of electricity each. The rst of the power plants, which will be built by a South Korean consortium led by Korea Electric Power Corp, should be up and running by 2017. In keeping with its energy diversication strategy, the government has also invested in solar power projects, with Shams 1 being the rst 100MW project. Bids have also been received for Noor 1, a 100MW photovoltaic plant, which is due to be operational by the third quarter of 2013. Noor 1 is expected to be followed by two new photovoltaic projects. The projects should enable Abu Dhabi to achieve the target of generating around 7% of its total energy from alternative sources by 2020. 1.1.2. Non-Hydrocarbons Sector Real Estate and Construction UAE’s real estate market was characterized by two dierent performance rhythms. In Abu Dhabi, the market remains more tenant favourable with rents and prices mostly at on account of over supply. As to Dubai, the recovery was relatively more pronounced this year but remains highlighted by a cautious optimism as demand returns for the higher quality projects. With regards to Abu Dhabi, the existing oversupply is increasingly suppressing demand thus weighing on prices and rental value. Within the residential segment, the range of options for tenants has denitely increased with the completion of a number of new projects. Yet, there remains a mismatch between demand and supply in terms of both quality and pricing. With regards to retail, there exists a discrepancy between the signicant amount of expenditures and the lower quality of supply. Pertaining to the oce market, the delivery has been signicant which has oered tenants with a wider range of options and boosted vacancy rates. Within Dubai, market optimism is more marked. Rents are leaving the bottoming out phase to enter an acceleration path with the hotel segment surpassing others. In fact, the former reported a strong performance in 2012 with occupancy rates surpassing the 2008 pre-crisis levels as Dubai consolidates its safe haven image through a rising number of tourists. The retail segment has also reaped the benets of the rising tourist arrivals. Conversely, the residential segment remains of a varied nature with the more established regions posting an increase in rents and prices while others were in a phase of stagnation. According to the Jones Lang LaSalle Real Estate Investor Sentiment Survey (REISS), Dubai emerged as the 5 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 clear favourite among real estate investors in the MENA region. According to the outlook report, it seems that lessons have been learned out of the crisis, mainly in terms of adopting a long-term and coordinated approach, rather than developing too many projects too quickly. On a corporate scale, the Abu Dhabi real estate market is marked by the government-backed merger between the two major real estate developers Aldar and Sorouh. The two companies are in the process of preparing a due diligence due in few months. The decision to merge came after the larger company, Aldar, has been rescued twice by the Abu Dhabi government through bail-outs totaling US$ 9.8 billion. In addition, in March of this year, Mubadala, the investment arm of the government of Abu Dhabi, transferred 14% of Aldar shares to the Abu Dhabi Commercial Bank (ADCB), in exchange of a loan, to be returned at maturity in April 2013. Sorouh, on its side, recently took a fair value loss of US$ 34.4 million on investments in the third quarter of 2012. The merger is expected to create a company with total assets worth US$ 15 billion. Also in Abu Dhabi, a government owned vehicle, Aabar, has signed a US$ 1.99 billion deal with the China State Construction Engineering Corporation to develop 30 properties in the capital. On the other side, the prots of Nakheel, a key real estate company in Dubai, have nearly doubled year- on-year in the rst nine months of 2012 reaching around US$ 330 million. The upturn was boosted by property handovers and growing business in its retail and leasing segment. In regards to government’s eorts, Abu Dhabi has established an authority to develop mass housing as it pushes ahead with social welfare initiatives, in a move that could spur demand within this segment. Also, the government of Abu Dhabi has recently issued a regulatory announcement whereby government employees will have to live in Abu Dhabi in order for them to be entitled to housing allowance. Such a regulation will help absorb the excess supply in the emirate’s residential sector. The ruler of Dubai, on the other hand, has approved a series of new development projects, including a US$ 681 million project for the expansion of Madinat Jumeirah resort due for completion in 2015. Transport Driven mainly by a rising trade activity with the world’s most dynamic emerging markets, the Emirates have taken great strides towards the role of a regional hub for the transports and logistics industry. Indeed, the World Economic Forum‘s 2012 Trade Enabling Index places UAE’s transport infrastructure rst in the region with revenues generated on an upward path since 2009 and set to reach US$ 8.1 billion in 2012, rising at an annual average rate of 8.5%. Also noteworthy is that bank loans allocated to the transport and storage sector are currently at their highest level of nearly US$ 27.8 billion, as per Central Bank data, exceeding the 2009 total of US$ 27.5 billion, after which lending to the sector declined for two consecutive years. The sector, accounting for circa 7% of UAE’s GDP, did witness the construction of major highways to connect all Emirates but the pace of new road delivery continues to somewhat lag behind given the growing demand fuelled by a rapid population growth. The UAE is currently constructing and expanding several port and airport facilities, as well as the rst nation-wide rail network. The UAE has only recently begun investing heavily in rail transport. The largest project by far in the country is the high-speed Etihad Rail network, a 1,200 km track to be constructed in three phases and projected to cost US$ 11 billion. The Etihad Rail network will also form a vital part of the planned GCC railway network linking the six countries of the Gulf Cooperation Council (GCC). The rst phase of the railway network is currently under construction and will connect Ruwais with Habshan by 2013 and Habshan with Shah by 2014. The second phase, expected to come online in 2016, will connect Abu Dhabi with Dubai. It will also provide links to Jebel Ali Port, Mussaah Port and Khalifa Port. The third phase will link rst and second-stage networks with the northern emirates and is expected to come online in 2017. Once fully operational, the Etihad Rail network is expected to serve about 16 million passengers and transport 50 million tons of freight annually. The air transport network in the UAE currently includes seven major airports, many of which are undergoing renovation and/or expansion. The UAE alone accounts for more than half of all airport investments in the Gulf region. Dubai International Airport processed 2.1 million tons of cargo in the rst eleven months of 2012, up by 3.6% year-on-year. In parallel, Dubai International Airport has announced a major modernization and expansion program for its cargo facilities as part of its US$ 7.8 billion Strategic 6 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 Plan 2020. The new program will increase Dubai International’s freight capacity to 3.1 million tons by 2018, as per Dubai Airports. Along the same line, Dubai International Airport handled 52.4 million passengers in the rst eleven months of 2012 (+13.4% year-on-year), making it the world’s fourth busiest airport in terms of this indicator, as per the Airports Council International. Al Maktoum International Airport, Dubai’s second airport and the rst phase of which came online in 2010, opened its rst terminal in 2012. By 2013, the airport is projected to handle 12 million tons of cargo annually. In addition, the Ajman International Airport is currently under construction. It will be able to initially serve at least 1 million passengers annually, as well as being able to handle a minimum of 400,000 tons of cargo. At the Abu Dhabi International Airport, a nearly US$ 6.1 billion redevelopment and expansion project began in the second half of 2012. The project includes construction of the 700,000 square meters Mideld Terminal Building, which would open in 2017 as Etihad Airways’ base of operations. The terminal will have a capacity of approximately 28 million passengers per year. During the rst eleven months of 2012, the airport handled 13.4 million passengers (+19.3% year-on-year). According to the International Air Transport Association (IATA), the UAE’s projected air trac growth of 10.2% between 2011 and 2014 will be second only to that of China. IATA predicts that the UAE will welcome 82.3 million inbound passengers during the period 2011-2014. With regards to maritime transport, the rst phase of the US$ 7.2 billion Abu Dhabi Khalifa Port opened this year. The project is due to come online in phases, the nal of which will be completed in 2030. Jebel Ali is the seventh largest container facility in the world, according to Cargo Systems’ ranking in 2009, and the largest port in the GCC region in terms of tonnage processed. Recently, Dubai port ocials in cooperation with port manager DP World announced plans to expand Jebel Ali’s annual capacity to circa 19 million twenty-foot equivalent units by 2014. Tourism Tourism has sustained its image of a vibrant and dynamic industry in the UAE, beneting from the country’s economic and political stability amidst the Arab Spring. Indeed, the UAE has emerged as a safe haven in times where a general risk perception has clouded the region, and has therefore, beneted from redirected tourism. COMPARATIVE HOTEL OCCUPANCY RATES Sources: Ernst and Young, Bank Audi’s Group Research Department AVERAGE RETAIL RENTS PER REGION* Sources: Cushman & Wakeeld, Bank Audi’s Group Research Department 7 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 In line with its diversication strategy, the UAE has kept up its eorts to boost the tourism sector. Regarding the year 2012, the total contribution of the sector to GDP is expected to grow by 4.5% reaching US$ 49.2 billion in 2012 versus US$ 47.7 billion in 2011, maintaining almost the same share of each year’s respective GDP at circa 13.5%. It is important to mention that the total contribution of tourism to GDP has registered a 10-year compounded annual growth rate of 18.8%, exceeding that of the region at 12.7%, according to the WTTC. Hotels in the UAE have beneted from the inow of tourists and hence registered high occupancy rates. Indeed, Dubai ranked 3rd among sixteen cities in the Middle East in terms of occupancy of four and ve star hotels in the rst ten months of 2012, as per Ernst and Young. Also, Abu Dhabi came 4th among the surveyed Middle Eastern cities with occupancy rates at 75% in the aforementioned period. The average room rate in Abu Dhabi came in line with the regional average of US$ 184 per night, whereas the average room rate in Dubai came 30% higher at US$ 240 per night. Dubai, whose total tourists arrivals grew by 10% and hotel revenue by 19% in the rst half of 2012, has recently announced a massive tourism and retail development plan. The project will include the largest shopping mall in the world, able to host 80 million visitors a year and include over 100 hotel facilities. In addition, as a result of its reputation as a luxury holiday destination, Dubai is facing a strong demand for the high-end accommodation, where occupancy levels are at near capacity. As a matter of fact, the emirate is on its way to add a number of ve star hotels to its portfolio in the course of the four coming years. In addition, works for airport expansion are underway to accommodate for the increasing passenger trac, set to exceed 50 million people in 2012. It is worth noting that Dubai ranked as the 8th destination city in the world, outranking cities such as New York, Amsterdam, and Kuala Lumpur, according to an index by MasterCard. In terms of the volume of international visitor spend, Dubai ranks 18th in the world with a projected US$ 8.8 billion visitor spend in 2012. On the other side, and according to the same index, Abu Dhabi emerged as the world’s fourth fastest growing destination city by visitors’ number with a 17.9% spike expected in 2012. The UAE capital is also expected to draw an international visitor spend of US$ 2.6 billion in 2012, representing an increase of 20.7% compared to 2011. Tourism is set to continue to grow as the UAE targets new markets and the country’s airlines continue to expand their networks through the purchase of new aircraft as well as partnerships with other international airlines. Indeed, the Abu Dhabi Tourism and Culture Authority (TCA), the body charged with promoting tourism development in the emirate, is conducting a series of roadshows in Saudi Arabia in a bid to attract more visitors from the Kingdom. Saudis visiting Abu Dhabi have already registered a year-on-year rise of 36% in the rst six months of 2012. The TCA has previously stated a total target of 2.3 million visitors in 2012, a goal it should achieve easily. Indeed, the TCA reported that more than 1.189 million guests had arrived to the capital’s hotels and hotel appartments in the rst six months of 2012, up by 14% relative to the rst half of 2011. HOTEL ROOM YIELD IN US$* Sources: Ernst and Young, Bank Audi’s Group Research Department AVERAGE HOTEL ROOM RATE IN US$ * Sources: Ernst and Young, Bank Audi’s Group Research Department 8 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 1.2. EXTERNAL SECTOR External accounts on a more moderate rhythm The UAE’s external sector performance maintained its upward trajectory in 2012, yet at a markedly more moderate stance than that seen in 2011 within the context of a slowdown in the hydrocarbons markets and weaker non-oil trade activity. Yet, the country is still managing to distance itself from the pre-crisis level as it escapes the trap of a current account decit owing to a sustained rise of the trade volume regardless of the wider services balance decit. Accordingly, trade activity saw a net expansion during 2012 on account of sustained higher oil prices coupled with increased diversication eorts. Yet, the momentum is still somewhat milder than that seen in 2011. The Economist Intelligence Unit (EIU) estimated total imported and exported free on board (FOB) goods at US$ 522,723 million, up by 8.1% relative to their value in 2011, year during which they had risen by 27.9%. Noteworthy is that this value constitutes a signicant improvement as it exceeds the 2008 pre- crisis trade volume of US$ 415,501 million. The growth in overall trade activity is the result of a rise in both imports and exports, although the former grew at a faster pace. Indeed, the EIU estimated that the rise in exports reached 7.4% in 2012 compared to a double-digit growth of 31.9% reported during the previous year, whereas imports are estimated to have grown by 9.0% in 2012, versus an increase of 22.8% registered one year earlier. Total exports increased by 7.4% year-on-year to reach US$ 302.4 billion in 2012. The rise in exports was still driven to a large extent by revenues generated from the oil sector. As a matter of fact, crude oil exports went up by 40.6% in 2012 following an increase of 50.8% in 2011 thus reecting the positive price eect. They now account for circa 42% of the overall export revenues compared with 32% a year earlier. As to non-oil exports, accounting for nearly 58% of the total, they amounted to US$ 175 billion in 2012, down by a yearly 8.4%. This compares to an increase of 24.5% in 2011. In parallel, imports edged up by a yearly 9.0% in 2012 to reach US$ 220.3 billion, as per the EIU. The ongoing yearly progression of import volumes actually comes in line with the country’s overall rising consumption and investment spending in a moderately growing real economy. The growth of exports at a rate lower than that of imports led to a weaker widening of the trade surplus by 3.2% to attain a historical high of US$ 82.1 billion in 2012, following an increase of 62.3% in 2011. The trade balance now accounts for 21% of GDP, versus a share of 23% in 2011. Overall, UAE’s comfortable merchandise trade surplus stands as a major buer against leakages from the services and transfers account, thereby resulting in the country’s predominant current account surplus. The services and income balances, which incorporate payments or receipts from transportation, business services, tourism, or licensing and salaries going in and out of the country, continued to register a decit of US$ 40.7 billion in 2012, up by 10.7% year-on-year against a higher increase of 21.2% seen in 2011. Over the past few years, the UAE has been upgrading infrastructure of such services to enhance its performance in those areas, and thus payments naturally exceeded receipts. Noteworthy is that tourism Sources: EIU, IMF, Bank Audi’s Group Research Department Sources: EIU, Bank Audi’s Group Research Department FOREIGN SECTOR INDICATORSEXPORTS & IMPORTS STRUCTURE 9 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 related revenues increased by 1.7% in 2012, as per WTTC, slowing down from the 4.1% rate reported in 2011 as the regional turmoil somehow eases and the UAE’s safe haven image subsides. As to the current transfers balance, it posted a decit of US$ 12.4 billion, up by a yearly 3.1%. This compares to a growth of 6.8% seen in 2011. The main component of transfer outows is remittances sent by the important expatriate labor force which accounts for the bulk of total workers in the UAE. The growth in remittance outows is estimated to have remained modest in 2012, practically the same as that of 2011. The modest rise in UAE’s trade surplus in 2012, coupled with wider decits at the level of services, income and current transfers balances resulted in slight contraction of the current account surplus as a percentage of GDP, from 9.7% in 2011 to 9.3% this year, as per the IMF. To sum up, UAE’s external sector managed to pursue its positive performance yet at a dampened pace than that seen in the 2011 oil boom period. This shows that the UAE still has overdependence on hydrocarbons exports and is indeed sensitive to the situation in international markets. First, pronounced international sanctions on Persian Gulf neighbouring countries risks aecting the UAE through a reduction in bilateral trade, real estate demand, tourism, and nancial services. Second, a marked economic slowdown in emerging Asia, a main partner to the UAE, would aect trade and tourism. Third, a decline in oil prices in light of weak growth prospects in the advanced economies would adversely aect export earnings at large. 1.3. PUBLIC SECTOR 2012 scal accounts on a consolidation stance The Emirates entered a phase of scal adjustment which aims at unwinding the stimulus seen during recent years and lowering the high breakeven oil prices without hindering economic recovery. Indeed, the rise of public expenditures as well as that of public revenues retreated in 2012 as the UAE takes a breather from the 2011 oil markets boom as well as the massive counter cyclical policy it had embarked on to tame potential spillovers from conict-stricken countries. After having reported an increase of 11.9% in 2011, the progress in scal spending is set to slow down to 6.9% in 2012, as per IMF gures. That of revenues is also on the same path with their increase slowing down from 40.5% in 2011 to 9.1% in 2012. Consequently, the country’s scal surplus would edge up by almost 14.0% in 2012 following a growth rate of more than 200% in 2011. Fiscal revenues, accounting for almost 36% of GDP in 2012, would be subjected to some downward pressures as those stemming from hydrocarbons, making up almost 80% of the total, witnessed a weaker momentum when compared to 2011. As a matter of fact, they are set to report an increase of 10.1% in 2012 after having risen by 54.2% in 2011 as the UAE’s oil output nears capacity levels. Conversely, revenues generated by non-hydrocarbons activities, accounting for circa 20% of overall scal revenues, are set to report an increase of 9.4% year-on-year following a decline of 1.3% posted in 2011. This acceleration is supported by the recovery in the non-hydrocarbon economy backed by strong trade, tourism, logistics, and manufacturing. As to scal expenditures, accounting for almost 24% of GDP, their value was more or less curtailed by the contraction in net lending and equity investments as the governments of Abu Dhabi and Dubai gradually withdraw from providing nancial support to the restructuring of government-related entities. Noteworthy is that the government of Dubai had ocially announced that it would not support any more restructuring deals, especially those identied as “non strategic” for the Emirate. Also, current and capital expenditures are on a slower path, mostly due to the comparatively better regional conditions, thus leading to more moderate social related spending and government’s scal consolidation eorts, especially within the context of an economic recovery gaining pace in 2012. As a result of government receipts growth outpacing that of spending, the UAE general government scal accounts have sustained their positive balance of 12.0% of the 2012 GDP for the third consecutive year, compared to a slightly lower surplus of 11.2% in 2011 and 4.3% in 2010. 10 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 With better growth prospects and scal consolidation eorts, UAE’s debt sustainability has further improved. Accordingly, the general government gross debt as a percentage of GDP is estimated to extend its declining streak with the ratio moving from 17.8% in 2011 to 16.5% in 2012, the lowest level since the global nancial crisis outburst. While the UAE debt levels are far from being worrisome in both absolute and relative terms, ongoing restructuring eorts of the comparatively highly leveraged government related entities continue to risk posing some contingent liabilities on the government’s balance sheet . 1.4. FINANCIAL SECTOR 1.4.1. Monetary Situation Sustained growth in Central Bank’s foreign assets Monetary conditions in the United Arab Emirates were marked in 2012 by a sustained growth in the Central Bank’s foreign assets amid rising oil prices, a moderate expansion in money supply, and subdued ination rate due to declines in housing rents. The overall Consumer Price Index for the UAE reached 117.29 in October 2012, according to the UAE National Bureau of Statistics, rising by 0.5% relative to October 2011. The small rise came within the context of a rise in prices in the education sector of 5.9%, the food and soft drinks sector (+3.3%), the restaurants and hotels sector (+2.9%), the recreation and culture sector (+1.0%), the medical care sector (+1.0%), the beverages and tobacco sector (+0.9%), versus a fall in prices in the housing sector (-1.5%) and the textile, clothing and footwear sector (-0.3%). The CPI increased by 0.7% during the rst ten months of 2012 as compared to the corresponding period of the previous year. This came in line with an IMF forecast of an average ination of 0.7% for full-year 2012, mainly due to a continuing decline in housing rents and limited pass-through of international food prices. In light of low global interest rates and subdued ination in the domestic market, UAE’s monetary policy stayed relatively accommodative under the xed exchange rate regime. However, the Emirates Interbank Oered Rates started to see declines across all tenors during the second half of 2012, with the one-year category reporting the highest fall of 35 bps since the beginning of the year to reach 1.63% at end- November 2012, which reects a pick-up in liquidity in the market. Amid signals of relatively rising liquidity in the nancial sector, the Central Bank of the UAE reported a rise in its Certicates of Deposits portfolio from US$ 21.9 billion at end-2011 to US$ 23.2 billion at end-August 2012, up by 5.7%, in the aim of absorbing the excess in liquidity. Monetary aggregates in the UAE showed a moderate expansion during the rst eight months of 2012. The narrow measure of money supply (M1) widened by 7.9%, moving up from US$ 71.9 billion at end- 2011 to US$ 77.6 billion at end-August 2012. This compared to a higher growth rate of 10.7% during the corresponding period of 2011. The broader money supply (M2) accelerated by 1.1%, moving up from PUBLIC DEBT AND INDEBTEDNESS RATIO Sources: IMF, Bank Audi’s Group Research Department SELECTED PUBLIC FINANCE INDICATORS Sources: IMF, Bank Audi’s Group Research Department [...]... additional funds for the private sector BANK ASSET COMPOSITION Sources: Central Bank of UAE, Bank Audi’s Group Research Department BANK LOAN BREAKDOWN BY ECONOMIC ACTIVITY * Sources: Central Bank of UAE, Bank Audi’s Group Research Department January 04, 2013 14 JANUARY 04, 2013 ECONOMICS UNITED ARAB EMIRATES Anyhow, the UAE s banking sector continues to face pressures on asset quality metrics, driven by... contrast, banks were seen reducing their reliance on wholesale funds with European banks (reportedly accounting for the bulk of foreign EVOLUTION OF BANKING AGGREGATES Sources: Central Bank of UAE, Bank Audi’s Group Research Department January 04, 2013 12 JANUARY 04, 2013 ECONOMICS UNITED ARAB EMIRATES funding for UAE banks) retrenching from non-core markets in an aim to trim assets and reduce leverage,... country’s economic recovery, with the exchange rate peg continuing to serve as an efective nominal anchor for the economy EVOLUTION OF MONETARY CONDITIONS Sources: Central Bank of UAE, Bank Audi’s Group Research Department BROAD MONEY AND INFLATION Sources: Central Bank of UAE, IMF, Bank Audi’s Group Research Department January 04, 2013 EXCHANGE MARKET INDICATORS Sources: Central Bank of UAE, Bank... Sources: Central Bank of UAE, IMF, Bankscope, Bank Audi’s Group Research Department January 04, 2013 COMPARATIVE BANKING SECTOR ECONOMIC DIMENSION * Sources: Central Bank of UAE, Central Banks of MENA countries, IMF, Bank Audi’s Group Research Department 13 JANUARY 04, 2013 ECONOMICS UNITED ARAB EMIRATES balances at the Central Bank) starting January 2013, and which would be replaced as of 2015 with... Central Bank of the UAE had set up a series of liquidity-oriented regulations, with four liquidity ratios such as a new liquid assets ratio whereby banks would be required to hold 10% of their liabilities in highquality liquid assets (cash, Central Bank CDs, UAE federal government bonds, reserves and other account COMPARATIVE FINANCIAL SOUNDNESS INDICATORS * Sources: Central Bank of UAE, IMF, Bankscope,... of 2012, moving up from 24.8% at end-2011 to 27.1% at end-August 2012 The UAE Dirham remained pegged to the US Dollar The peg has provided stability for decades, and, having ridden out the problems that ixed currency brings for this long, the authorities seem keen not to change the system Looking forward, the Central Bank of the UAE is expected to retain a loose monetary policy given low inlation, weak... limiting repayment periods to no longer than four years The overall mild increase in lending and continued provisioning on behalf of UAE banks weighed on their proitability In the absence of recent consolidated statistics, the aggregation of bottom lines of 19 listed UAE banks accounting for the bulk of sector activity shows a modest 3.2% year-on-year increase in net proits over the irst nine months... Central Bank of UAE, Bank Audi’s Group Research Department 11 JANUARY 04, 2013 ECONOMICS UNITED ARAB EMIRATES 1.4.2 Banking Activity Satisfactory activity growth though asset quality challenges persist The United Arab Emirates’ banking sector registered an overall satisfactory activity so far in 2012 amid broadly positive macroeconomic performances in a still challenging global backdrop Measured by banks’... resident deposit base was pulled upwards during 2012 by the government (+20.2%) and individuals (+7.9%), within the context of sustained high oil prices and positive macroeconomic performances, while the non-government public sector reported a stagnation in deposits and the corporate private sector registered an 8.3% retreat due to lower deposits mostly on behalf of businesses and industrial institutions... extent the savings deposit components It is worth noting that UAE banks’ gradual lengthening of their deposit maturity proiles over the past few years somewhat helps them alleviate vulnerability to challenging external funding market conditions Although deposits below the six-month horizon still account for the bulk of time deposits in the UAE, their share has declined to the beneit of funds with a maturity . Department UAE ECONOMIC PERFORMANCE GDP BREAKDOWN BY ECONOMIC ACTIVITY* 3 January 04, 2013 ECONOMICS UNITED ARAB EMIRATES JANUARY 04, 2013 1. ECONOMIC CONDITIONS 1.1 Introduction 2 Economic Conditions 3 Real Sector 3 External Sector 8 Public Sector 9 Financial Sector 10 Concluding Remarks 18 The UAE Economic Report can