UAE market set to rebound?

Gauging the investment and market sentiment in a country is not an easy task. In the absence of any other solutions, surveys and economic research reports help business analysts and the media to develop an opinion on a country’s investment and market sentiment.

As the business season in the UAE and the GCC starts this month, following a three-month summer break, we take a look at the UAE’s overall economy and market sentiment, to understand the situation and see which way the market is heading.

For the past few quarters, the debate was mostly limited to the current downward-cyclic phase of the economy; whether it has bottomed out or it is going to decline further. While most people have returned from their vacations and are back in business, these are some of the questions bothering them. Some might also be concerned about job security and whether companies will downsize further.

While the enactment of the Federal Bankruptcy Law – aimed at decriminalization of financial insolvency – might add to the concerns, it will, nevertheless boost investor confidence in the UAE economy.

Broad overview

However, before we look at the UAE’s  economy, let’s try to understand the global context. September was a busy month for potentially market-moving events in the global economy. The three central banks have had policy meetings, such as the G20 annual meeting.

“After such consistently solid performances from most asset classes, the next few months could be more challenging. We expect more volatility and the potential for swift profit-taking in risk assets if investors see trouble,” noted Gary Dugan, chief investment officer of Emirates NBD. For now, the feel-good factor in the markets continues. Global economic growth is better, or at least more consistent, and central banks are supportive without upping their intervention, he said, adding: “We continue to believe that investors are playing a game of trying to seek out returns from very short-term rallies in asset classes, rather than any profound commitment to risk assets such as equities.”

“Investors are likely to maintain their modestly positive position in risk assets. All three major central banks, the Federal Reserve, European Central Bank (ECB) and the Bank of Japan, remain very much in play,” he continued. “After good performances from many asset classes in August, much will depend on whether policy makers deliver on the ongoing easing of monetary policy.”

So how does the global economic situation help or affect the market situation? In its annual Article IV Consultation report on the UAE economy, the International Monetary Fund (IMF) gave a clear picture of the economy’s resilience and its ability to meet the growing challenges.

“Persistently lower oil prices continue to weigh on economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, limited negative inward spillovers and contained the weakening of investor appetite,” the report said.

Non-oil economic activity has slowed to 3.7 per cent in 2015, driven by a contraction of public investment in the context of fiscal consolidation and lower contribution from domestic private demand. Negative effects on overall growth were partially offset by the increase in oil production.

Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1 per cent of GDP, while the current account surplus declined to 3.3 per cent of GDP. Banks remained well capitalized and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs, the report said.

The way forward

Economic activity is expected to moderate further in 2016 before improving over the medium term. Non-hydrocarbon growth is projected to slow to 2.4 per cent in 2016 due to fiscal consolidation, a stronger dollar and tighter monetary and financial conditions. Over the medium term, non-hydrocarbon growth is forecast to increase to above four percent, as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions as oil prices rise, a pick-up in private investment in the run-up to Expo 2020 and stronger external demand, it said.

Although most large businesses have already tightened their belts, small and medium-sized enterprises (SMEs) are facing most of the pressures of slowdown due to the cash-flow situation, reduced revenues, declining order books and delayed payments. Their situation has been worsened by the banks’ refusal to extend credits to SMEs.

“Structural reforms aimed at raising productivity, improving competitiveness and further diversifying the economy should be pursued. The focus should be on improving business environment, relaxing constraints on foreign ownership, fostering competition, upgrading the quality of education, promoting innovation and entrepreneurship, and easing SMEs’ and start-ups’ access to finance,” the IMF said.

Despite these, the Emirates NBD UAE Purchasing Managers’ Index (UAE PMI) shows solid non-oil private sector growth in August. The strong performance of the UAE’s non-oil private sector recorded at the start of the third quarter was largely maintained in August, it said.

After having risen to a ten-month high of 55.3 in July, the headline seasonally adjusted UAE PMI signaled another month of solid growth in August. At 54.7, the index was down fractionally but still above the overall series average (54.5). Notably, the latest improvement in business conditions was stronger than those seen during the first half of the year.

“Business conditions improved solidly, supported by sharp rises in output and new work. The respective rates of expansion held broadly steady following July’s recent highs. The health of the sector was reflected by further growth of employment and purchasing activity, with the latter picking up to a nine-month high,” it said.

Non-oil sector growing

Underpinning the non-oil private sector’s growth as a whole were sharp expansions of output and new work. Khatija Haque, head of MENA Research at Emirates NBD, said: “The PMI data is consistent with our view of slower but solid economic growth in the UAE in 2016.”

Although a delay by market index compiler Morgan Stanley Capital International (MSCI) for a possible upgrade to the UAE’s bourses dragged down the Dubai Financial Market index, things are not that bad. MSCI said its classification review period had been extended until December to give additional time for market participants to “assess the impact of the recent positive changes implemented” in the UAE and Qatar, which are both seeking an upgrade to emerging market status.

However, a string of recent project announcements by a number of Dubai government-related entities in September raised optimism that the economy and the real estate market might be bottoming out. Dubai Holding’s $20 billion new township, Jumeirah Central, was followed by two new projects from Nakheel, totaling AED12.5 billion, to build residential homes in Jebel Ali Gardens and Deira Islands. These are clear indications that the government wants to go ahead with the projects.

In addition to these, private developers such as Damac Properties, Azizi Developments, Danube Properties, Sobha and Shaikhani Group, have announced new developments and construction contract awards. The announcements are backed up by solid planning and development time frames as well. Nakheel has also gone ahead and announced the consultancy and construction contracts.

The Dubai Land Department said it recorded 38,838 real estate transactions in the first eight months of the current year, reaching AED158.541 billion ($43.19 billion) – higher than the GDP of many countries. So, despite headwinds, things are looking up in the UAE.

“The UAE economy demonstrated remarkable resilience in the face of the oil-price decline and continues to benefit from its safe-haven status in a turbulent regional environment. The non-oil economy grew by 3.75 percent in 2015 despite a contraction of public investment as a result of further fiscal consolidation in Abu Dhabi,” a joint statement by Hazem Beblawi, IMF executive director for the UAE, and Mira Merhi, IMF advisor, said.

“While the UAE’s growth prospects are favorable, authorities remain vigilant about external and domestic risks as elaborated in the staff report. However, these potential risks are mitigated by the country’s substantial foreign assets and low level of debt, which provide ample financial buffers and policy space. The authorities’ plan is to further reduce the contribution of oil to GDP to less than 20 percent by 2021, as per the National Vision 2021,” the statement added.