DUBAI - UAE will be able to dodge a severe blow from the global economic crisis as the country is viewed to still maintain fiscal surplus in 2008 and 2009 since it has the lowest break-even oil price in the GCC of $23 (Dh84.48) per barrel against the IMF’s baseline petroleum price projection of $68 per barrel for 2009, a report by Abu Dhabi Commercial Bank (ADCB) said on Sunday.
According to IMF estimates, inflation is expected to drop to 10.8 percent next year from 12.9 percent this year, while the current account surplus would reach $55.3 billion against $60.9 billion in 2008. The estimate showed that the current account surplus would reach 22.6 percent in 2008 and 18.8 percent next year. While the GDP growth is likely to drop to six percent in 2009 from seven percent this year.
The report said government-backed projects in infrastructure, power and water will remain secure due to economic demand and political will. Planned infrastructure investments announced by the private sector will not be abandoned, though the pace of growth may slow down.
It noted that in the previous cycle, mostly petrodollars were mostly spent on consumption, which fuelled growth in Western economies. However, in the current cycle petrodollars were invested regionally boosting productivity. In addition, a rising population and expatriate community will support domestic demand, which will stimulate growth in non-oil GDP. It said Asia and emerging economies are beginning to replace Western countries as the UAE’s main trading partners, providing some protection against the worst effects of the downturn.
The report said the emirate’s debt has been backed by foreign asset reserves that leaves the country’s capacity unimpaired. The bank added that the recent central bank’s measures to inject liquidity in the local financial market were merely precautionary and that the underlying financial system is sound.
The corporate fundamentals in the UAE remain largely intact but overlooked, the report said.
The UAE penetration rate - the ratio of bank assets to GDP - of 172.9 percent (2007) is lower than the average penetration rate enjoyed by developed countries, emphasizing the sector’s substantial growth opportunities. In comparison, the euro region reported a penetration rate of 223 percent for the same period.
The report said the sector would greatly benefit from the country’s conducive macro-economic environment to sustain future growth. The bank hopes that $360 billion worth of real estate, tourism, manufacturing and oil-related investment projects by Dubai and Abu Dhabi in the medium term and low interest rate due to the dollar peg would stimulate credit growth and mitigate other bear factors.
The sector achieved considerable growth between 2004 and 2007, as measured by all key banking parameters with loans up 39.7 percent, deposits 32.1 percent, and profitability 38.4 percent, due to a highly supportive macro-economic environment.
Return ratios within the sector remained strong due to a robust performance by both core banking and non-interest income. The sector maintained a return on equity (ROE) and ROA of 22 percent and two percent, respectively, during the same period.
Regional consolidation, international diversification of revenue base, growth of Islamic banking and adoption of emerging trends will yield value and steer the sector’s growth this year. – Agencies