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In a most recent note to investors, Bank of America focuses on Qatar and UAE economic development and highlights the benefits for the emirates‘ economy in the event of the success of Dubai’s World Expo 2020 bid. The report doesn’t reveal new and unknown facts, but rather nicely summarizes already published by the local media information.
A successful Expo 2020 bid on November 27 should provide a modest lift to Dubai’s GDP growth. Moreover, the growth would accelerate with the nearing of the event. The main downside risk remains project funding, given the existing elevated leverage in the system. In addition, a subsequent overcapacity in the hospitality sector could weaken its profitability.
A boost to Dubai GDP growth
A successful Expo 2020 bid should lead the award activity pipeline to show strong improvement, and spur job creation in Dubai. The authorities estimate the total impact of a successful Dubai Expo 2020 bid at US$23bn (24.4% of GDP), spread over the period 2015 to 2021. This would include the total spending by the host, participant and visitors, as well as the impact on the supply chain and consumption. While this equates to an annual 3.5% of GDP, the bulk is likely to materialize around the Expo event in 2020.
Dubai government to shoulder financing
While the bid is a federal UAE bid, financing of capital requirements will be carried out or guaranteed by the Dubai government and thus weigh on the ongoing fiscal consolidation plans. Authorities estimate total financing costs of US$8.4bn (8.9% of GDP), of which the Dubai government will commit to fully funding the capital needs of US$6.8bn (7.2% of GDP). The latter would be directed to develop city-wide infrastructure that is not already in the pipeline currently, the Expo area itself and the immediate
vicinity. The remaining amount (US$1.6bn or 1.7% of GDP) relate to the operating costs, which the authorities indicate they expect to be recovered in full from the anticipated revenues generated from the Expo operations. These costs will nevertheless be incurred in the period prior to the Expo and are likely to be financed through domestic short- to medium-term overdraft facilities.
The incremental building work specific to the Expo would result in the construction of 1.2mn sqm of usable space (700k sqm for the pavilions, venues and supporting facilities within the Expo site and 500k sqm of permanent structures around the site). The onsite building works would commence only after the registration document of the master plan is approved towards the end of 2015 and would be aimed for completion a year ahead of the event. As such, the US$6.8bn in capital spending (AED24.8bn or c30% of Dubai’s gross fixed capital formation) spread over 4 years (2016-2019) equates to AED6.2bn per year in
government capex spending (1.8% of GDP). This would essentially double the current government capex in
nominal terms back to the levels of pre-financial crisis. However, the current capex levels are likely to come down as a number of projects come to completion in coming years, and that a portion of this growth is likely to be leaked through higher import content of capital goods.
Job creation, tourists to peak with Expo
Authorities estimate 277,000 jobs will be created if the Expo 2020 bid is successful. 40% are expected to be in the hotel and restaurant sectors (for the six months duration of the Expo) while 30% would be in the construction sector, peaking in 2018-19, and the remaining 30% would be in tertiary sectors such as transport & logistics, business services & retail. Authorities also project to receive 25mn visitors over six months, with over 70% of these originating from outside of the UAE. The total number would include 7.5mn resident visitors, 2.2mn Gulf Cooperation Council Countries (GCC) visitors, and 5mn transit visitors. With a separate government target to attract 20mn tourists annually by 2020, the Dubai Expo thus ambitiously targets to nearly double the number of annual visitors. While restaurants & hotels form 4.5% of real GDP, wholesale & retail trade forms 30% of real GDP, which should allow for a material, yet short-lived, lift to economic activity in 2020.
Given a likely import leakage and an assumed ratio of real GFCF to real GDP of 20-25%, we estimate the incremental government capital spending for the Dubai Expo can increase Dubai GDP growth by c0.5ppt in the period 2016-2019, all things being equal. While there are a number of uncertainties surrounding tourism forecasts and spending, Bank of America estimates Dubai Expo can raise Dubai’s GDP growth over the period of the fair by c2ppt through higher job creation, consumption and tourism flows.
Construction & property stocks to benefit at most
Dubai’s status as a leading global transportation hub with strong infrastructure and proven attraction as a tourist destination provides support to the widespread belief that Dubai is the bid front runner. A successful bid would be indeed positive for Dubai’s macroeconomic outlook, but even more positive for the UAE contractors and property stocks.