- Macro View: The UAE continues to be immune to the regional civil unrest. Growth is recovering gradually on high oil prices and a robust external sector, though the real estate market continues to be a drag on growth. The Dubai Inc. restructuring has progressed but global backdrop will test this.
- Main Risks: Bahrain standoff could increase regional geopolitical risks. A prolonged drop in oil prices, a deteriorated G3 outlook, unpleasant surprises in Dubai Inc. restructuring and hampered market access to external finance would hurt the macro outlook.
- Strategy: Dubai EXD sold off hard during the EM risk-off mode but has bounced back since. Bank of America Merrill Lynch remains MW Dubai EXD at these levels. They are constructive on high quality Abu Dhabi EXD and maintain our OW stance.
Global backdrop shows the colour
The UAE has benefited from high oil prices, higher oil production, and a favourable external environment amid a still large real estate supply overhang until now. Dubai’s service-based economy has also further benefited from diverted regional capital flows following unrest in Bahrain and increased liquidity in the banking sector (though improvements in the latter’s LTD ratio may come to an end). The global backdrop could become more challenging now. Bank of America Merrill Lynch is now pencilling in growth of 3.9% (up from 2.8% previously) in 2011, but cut growth to 3.0% from 3.5% previously in 2012 in the UAE.
Domestic demand seems to have rebounded, judging by high-frequency counterparty import data and a pick-up in non-food, non-housing CPI inflation. Imports of Japanese construction services remain still in the doldrums however, pointing towards weak construction activity. Nevertheless, credit to the private sector remains unsurprisingly weak and the loan book of the banking sector grew by 2.5%ytd. External factors (tourism with Dubai airport passenger numbers up 9.7%yoy in July but just 0.8%yoy in August, re-export activity) have all lent Dubai support over the first part of this year.
Dubai gained some space but strains have not dissipated
While deleveraging strains have eased, they have still not yet dissipated in the UAE economic outlook. Dubai EXD had been the best performer in EEMEA prior to the EM market sell-off. Following successful refinancings/restructurings, Dubai has a six to nine month window before the more problematic maturities in H212. Still, ongoing restructuring pose some risk. Including those, Dubai has US$6.7bn left to service in 2001. However, a post-restructuring schedule excluding government, guaranteed and bank debt brings this figure to US$1bn, much of which has been pre-financed.
The recent passage of a new public debt law in the UAE is positive and may diminish deleveraging strains. The law paves the way for federal debt issuance (the UAE first sovereign bond), as well as local issuance by local governments. It is also likely to help shelter Dubai economy from refinancing risks in the international markets, as it could tap local liquidity in the domestic market instead. However, given the time frame for issuance of federal bonds, Bank of America Merrill Lynch does not expect this to impact the continued restructuring of Dubai Inc. debt in 2011.