United Arab Emirates Business Forecast Report Q4 2009

Recession: Light At The End Of The Tunnel? Conditions have not really improved for the UAE over the last three months (although the absence of regular data releases means that growth in recent quarters remains hard to quantify). Oil prices look weak once again, global trade remains subdued, banks continue to exercise caution in their lending and the property market remains dire. In this environment, government intervention is the only thing stopping the recession from becoming more severe, and we see little chance of it pulling back on spending until global conditions start to pick up.

The UAE has remained fairly quiet on the topic of the recent political unrest in Iran. Relations with its Persian Gulf neighbour are complicated; the two countries have an ongoing territorial dispute, and the UAE is hardly appreciative of Iran's role in stirring unrest in the region, which could have negative implications for the local economy. On the other hand, the two countries have extensive trade relations, and the UAE has been reluctant to bow to US pressure to reduce its economic ties with the Islamic Republic. We expect little change in this policy going forward, with pragmatism continuing to rein supreme in Emirati diplomacy.

We have revised our GDP forecasts down this quarter and now anticipate a contraction in real GDP of 2.8% in 2009, driven by a combination of reduced consumer spending, a sharp drop in private investment and a contraction in net exports. The government has already ramped up its own spending in response to the downturn, pumping money into the financial sector and propping up state-controlled property firms. The good news is that the economy is fairly well placed to take advantage of the global recovery that we are forecasting for next year. Indeed, we see the UAE outperforming its GCC counterparts next year, with real GDP growth of 3.7%.

As the economic crisis continues to bite, the government is seeking to rationalise its huge portfolio of businesses in the financial and real estate markets. After several bank mergers, it was announced recently that property giant Emaar is to merge with several real estate firms owned by Dubai World, itself owned by the Dubai government. The move illustrates both the financial pressures that firms are currently under, and the extent of government control over the economy.

This may prove beneficial in the short term, with the government pumping money into numerous infrastructure projects designed to improve the economy's competitiveness.