UAE economy to contract 1%JEDDAH - The economy of the United Arab Emirates is likely to contract 1 percent this year, led by a decline in its oil sector as it implements OPEC production cuts, Samba Financial Group said on Tuesday.
Economic growth in the Gulf oil exporter would likely recover to nearly 3 percent in 2010 as global conditions improve and oil production recovers, the Saudi-based bank said in a research note.
In February, Samba predicted economic growth in the UAE would slow to 0.5 percent this year, from 6.8 percent in 2008.
Based on an average oil price of $57 per barrel in 2009, the UAE’s current account was expected to remain in surplus, although at 1.4 percent of gross domestic product, compared with 22 percent in 2008.
The UAE’s 15 percent cut to oil production in line with OPEC production targets “is expected to result in a sharp real decline in the hydrocarbons sector which is a major factor behind the projected overall contraction in real GDP this year”, the note said.
Abu Dhabi, holder of more than 90 percent of the country’s oil reserves, would likely help support the UAE federation’s six other emirates, particularly Dubai, through the downturn, and the UAE would meet its debt commitments, Samba said.
“Despite the still difficult external financing environment, the UAE will not allow any defaults.”
“Having saved a large proportion of the oil windfall of recent years, ample public funds are available to meet all debt obligations, and recovering oil revenues will swell resources further,” the note said.
However, how federal support will be provided to ensure repayments are met, particularly by Dubai government-related entities, was still an open question, the note said.
Recent developments suggested the UAE federal government could increasingly rely on using its strong creditworthiness of to raise funds and guarantee borrowing by corporate entities and banks, Samba said.
The bank also said that deflation was a possibility at some point in 2009 as house prices remained under pressure, the bank said, although annual average prices were still expected to remain positive at around 1 percent.
“A brief period of monthly negative inflation is certainly possible later this year. However, this is likely to be short-lived,” the bank said
Stronger oil prices, and government efforts to stimulate economies and support domestic credit growth should help bolster demand in the second half of the year, the bank added. - SG