Economy projected to grow 3.9 pct in 2013 Non-oil sector seen to make significant contribution

A report issued by KFH-Research expected that the UAE economy will grow by 3.9% in 2013, and that industrial production will improve gradually, where non-oil sector role in the UAE economy will be more significant. Meanwhile, tourism will prosper after taking advantage of the current developments in the region. The report reflected its trust that the government will continue to improve work environment to encourage foreign investments, and maintain its taxes system that attracts investors, in order to cement the trust of investors and increase direct foreign investments.
The report mentioned that the constructions sector will overcome its rates that have been declining for the past two years, and achieve growth in 2013, amidst expectation that Abu Dhabi, Dubai, and other northern states, will shoulder touristic and infrastructure projects.

We forecast moderate economic growth for the UAE, at 3.0% in 2012, conservatively lower than the Central Bank’s forecast that growth may be exceeding 3.5%. Growth is, however, expected to be higher in 2013 at 3.9% on expectation of accelerating domestic recovery and gradual improvement in global economy.
On the supply side, industrial production will recover gradually, supported by favourable policies. The services sector will register solid growth while the tourism sector in the UAE is likely to continue to benefit considerably from the regional unrest in the early part of the forecast period. The expansion in the country’s airlines - through the purchase of new aircraft as well as partnerships with other international airlines - will also boost tourism.
The likelihood of further major discoveries in the UAE is low, but enhanced oil recovery (EOR) techniques are being successfully utilized to increase the extraction rates of the UAE’s mature oil fields, and the recovery of oil prices following the global financial crisis will help maintain the commercial viability of such endeavours. Leaders in the UAE hope to increase crude oil production to 3.5mln bbl/d by 2018. Last year, the country has pumped around 3.1mln bbl/d, making it as the highest crude production levels since it began exporting oil five decades ago.
The UAE’s economy will continue to rely on the hydrocarbons sector to drive growth, but the non-oil sector will become increasingly important, especially in the latter half of the forecast period when major industrial projects come on stream. Large projects include the USD20bln petrochemicals city, Al Gharbia Chemicals Industrial City (Chemaweyaat), which is due for completion in 2015, the USD4.5bln expansion of Emirates Aluminium (EMAL), which will boost annual aluminium capacity to 1.3mln tonnes/year (t/y) by the end of 2014. These will account for robust growth in the manufacturing sector. Construction and utilities will also grow rapidly, at an annual average of 12.7% a year in 2012 onwards, as emirate-level governments increase capacity to meet the projected increase in electricity consumption-electricity consumption in the UAE is forecast to increase from an estimated 85,667 gwh in 2011 to 135,462 gwh in 2020. Although real growth in the construction sector slowed considerably in 2011 and will remain subdued in 2012, growth will pick up from 2013 onwards as Abu Dhabi, and to a lesser extent Dubai and the northern emirates, increase spending on tourism and other infrastructure projects.
The contribution of non-oil sectors in the UAE is expected to be more significant as the UAE government has boosted its efforts to diversify the economy. Business conditions at non-oil producing firms in the UAE improved again, as reflected by improving HSBC PMI Manufacturing Index to 53.7 in November 2012. The current PMI index is above the series average of 52.7, signalling a further increase in output at non-oil producing firms in the UAE. The strong new orders and new export readings are particularly encouraging and point to an economy not only showing growth but well placed to maintain momentum. Despite the sustained pick-up in activity, the PMI shows the economy operating well within capacity; as a result, the upward pressures on prices and wages remain moderate.
We expect UAE’s non-oil GDP to grow at 3.5% y-o-y in 2012 from 2.7% y-o-y in 2011. As the UAE develops into a major services hub in the Middle East, its dependency on oil exports has declined gradually. The contribution of the non-oil sectors has remained more than 60.0% of its GDP. Post 2009 recovery, the major drivers of the non-oil sectors are trade, tourism, logistics and manufacturing. In Dubai, the export-orientated service sector is showing significant growth, with tourist arrivals hitting a new high in 2012.
Against the backdrop of weak global economic conditions, the authorities will maintain their focus on protecting the domestic economy to sustain growth. The federal government will continue to improve the business environment to encourage foreign investment and to maintain its attractive tax environment.  The UAE’s ranking in the World Bank’s Doing Business 2013 report has improved by three places to 26th (out of 185 countries).
The overall improvement in the business environment in the UAE is expected to boost investor confidence and prompt an increase in inflows of foreign direct investment (FDI). FDI inflows increased by nearly 40.0% in 2011 to USD7.7bln, from USD5.5bln recorded in 2010. While this is not as high as during the boom period of 2005-2008, it nevertheless indicates an increase in investor confidence in the economy, which we expect to have continued into 2012. The “Doing Business” report backs up our forecast that the UAE’s business environment will continue to support private sector activity and overall economic growth moving forward.
Nonetheless, downside risks remains as a marked spill over of the current crisis of peripheral Euro countries into the core euro-area and global financial markets could have major financial repercussions for the UAE and the GCC region, with particular contagion risks for economies that depend on foreign financing and that have financial links to Europe. A worsening of the euro-area debt crisis could impact the GCC through trade and financial linkages.
Increased global risk aversion is adding to financing costs and limiting the availability of credit, particularly in the GCC due to geopolitical tensions in the neighbouring countries. Heavy deleveraging by European banks is hitting those countries most dependent on such lending, for example the UAE. The project finance market suffered in 2011 with just USD21.0bn of deals being closed. The pattern is expected to continue in 2012 and 2013 maybe even beyond as many banks stay clear of the market, not just because of risk aversion and general deleveraging but also thin pricing in perceived riskier markets.
Domestically, over reliance on oil revenue may pose a risk to the GCC’s economy as it can lead to fiscal unsustainability. Volatility of the oil dependence occurs due to volatility of oil prices. To avoid this issue, the GCC has to start focussing on non-oil sector to support growth. There are also medium-term concerns. While overall fiscal positions have improved, non-oil fiscal deficits have widened and progress in developing both non-oil economies and private sectors has been harmed by some of the increased governmental spending.


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