United Arab Emirates Infrastructure Report Q3 2008

Inflation remains a central concern for the government, and BMI estimates that it will reach 6.0% in 2008. This also becomes a key constraint for the Emirates booming construction industry, exacerbating the cost burden from rising raw material prices and eroding the actual returns on investments. In BMI's Q308 UAE Infrastructure Report, we forecast that the construction industry in the UAE will reach a value of AED70.9bn (US$19.3bn) in 2008, registering inflation adjusted (real) growth of 8.64%.

Adequate infrastructure development is the backbone of the UAE's growth. Investments in transport and utilities are pouring in, but they follow decades of underinvestment and assets that are now struggling to keep up with the rapid pace of construction. Some cracks are beginning to appear. There are reports of buildings remaining idle because the provision of power and water is inadequate. The governments of the different emirates are opening up sectors to private sector investments, for the first time, in an effort to draw in as much expertise and funds as possible, to respond to rising demand.

Investments in utilities and transport are also picking up pace, while the governments of the different emirates are drawing comprehensive strategies for growth in the sectors. In utilities, the Dubai Electricity and Water Authority (DEWA) is planning the financing for infrastructure investments, while the partial divestment of Abu Dhabi's integrated water and power plants (IWPPs) has given the opportunity to several investors to enter the utilities market in the UAE. In addition, the Department of Transport in Abu Dhabi unveiled a five year plan for the development of the emirates transport network. The highlight of the plan was the proposal to built the country's first high speed railway between Dubai and Abu Dhabi.

The continued involvement of the private sector a clear regulatory environment for public private partnerships in the UAE has ensured that the country has the highest levels of FDI in the region, much of which is diverted towards infrastructure development.

Risks however loom. The market does appear to be in serious danger of overheating. Costs of all major inputs - land, labour, steel, cement - are soaring and dampening the sector's competitiveness. In addition, the inflation in the UAE remains a concern, which not only further escalates cost burdens, but also has the potential to erode profits. We are forecasting real GDP growth of 7.7% in 2008 on the back of the ongoing investment boom. We are becoming more cautious however, given the risks posed by high inflation, as well as capacity constraints that are appearing in the economy. Finally, the shortage in the labour market, in addition to recent labour unrest regarding the working conditions, have added to the problems in the UAE's construction market, jeopardizing investments in infrastructure.