United Arab Emirates Commercial Banking Report Q1 2008

From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

The UAE's overall CBBER is 66.0. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. The UAE's CBBER is average for the countries in the Middle East and Africa. Within the CBBER, the most important aspect is the banking market element of the limits to potential returns. This element accounts for 42% of the overall CBBER. The UAE's rating for this element (65.6) is about the same as the overall CBBER and is higher than the country element of the limits to potential returns (54.1). This indicates that the UAE has a highly sophisticated commercial banking sector. These figures highlight the factors holding back the UAE's banking sector. Despite the fact that the banking is in general highly developed compared to the general wealth, stability and financial infrastructure of the country, in some ways the UAE performs poorly relative to nearby countries. One contributing factor is the relatively low level of per-capita GDP (which is exacerbated by the uneven distribution of income).

Our view is that real GDP growth will remain strong over the forecast period, to 2012, in spite of inflationary pressures. The IMF puts real GDP for 2006 at 9.4%, in its latest Article IV review of the UAE, above our 9.0% estimate, which bodes well for another very good performance in 2007. We are projecting a rate of 7.1%, as a result of a small contraction in the oil sector (2.6%), offset by continued out-performance in the non-oil sector (10.5%). Thereafter, we see a cyclical slowdown Over the last few years growth has been driven by ample oil-derived liquidity, which has boosted government and consumer spending power and investment and enabled the government to provide a favourable tax environment for business. We see all of these factors continuing. Over the medium to long term, we also expect portfolio inflows to complement the oil-derived liquidity. We see huge potential in the Abu Dhabi General Index and Dubai Financial Markets General Index over the coming years, against the backdrop of a sound macroeconomic fundamental picture. Against this backdrop, we see solid real expansion for all sectors of the economy. The financial sector outlook is particularly bullish, with the Dubai International Financial Centre a key hub, along with Bahrain and to some degree Qatar, for the liquidity pervading the region. With regard to the main question on most investors' minds - the sustainability of the property market boom- we are largely sanguine, although some cyclical correction is likely and we see housing prices falling further out in the forecast period. Any downturn in the property market should be a healthy correction in the longer term, restoring the UAE's competitive advantage in terms of its appeal to businesses and skilled employees, and increasing consumer spending power.