United Arab Emirates Infrastructure Report Q4 2008

Steel prices in the United Arab Emirates (UAE) have been declining since August and we anticipate that the decline will continue in October as well, heralding an easing in the costs for contractors. However, the decline in prices comes as a result of feared demand destruction, indicating that the construction sector in the UAE is - as we have been expecting - entering dangerous territory. The booming UAE construction sector has not been able it seems to avoid the impact of the financial crisis and global macroeconomic instability. Appetite to take on costly projects is decreasing as the costs and various other challenges discussed herein are rising (although steel prices have declined they are still approximately 60% to 70% higher year-on-year). In addition, the decline of the oil prices, the government's main revenue source, is a sign that the oil windfalls, although still massive, will reduce. Oil windfalls have been a major source for infrastructure funding as they have been re-invested in transport, energy and utilities projects which have fuelled the infrastructure boom in the emirates.

We have revised our construction sector forecasts for 2008 onwards. Primarily, this comes as a result of new model being introduced in our forecasting methodology, a change that has been introduced across the spectrum of BMI's Infrastructure Reports, in an effort to increase the reliability of our data. In BMI's Q408 UAE Infrastructure Report, we forecast that the construction industry in the UAE will reach a value of AED 82bn (US$22.5bn) in 2008, registering inflation adjusted (real) growth of 7%. We anticipate that growth in the construction sector will decelerate during 2009 and 2010. We believe that governmentbacked infrastructure spending will sustain the construction sector growth, at a time when private investments are expected to decline. Our extended forecast indicates that although the stellar growth of the past will not likely resume, the construction sector real growth will resume in 2010 and average a highly respectable 8.1% annual average growth between 2010 and 2018.

We reiterate that the fundamentals which support infrastructure growth in the Emirates are still strong.

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 and a clear regulatory environment for public private partnerships in the UAE, has ensured that the country has the highest levels of foreign direct investment (FDI) in the region, much of which is diverted towards infrastructure development.

Risks however loom. Costs of all major inputs - land, labour, steel, cement - are high 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. End-of-period inflation is forecast to be 11% in 2008, declining to 7% in 2009. We are forecasting real GDP growth of 7% in 2008 and this is forecast to decline to 6.6% in 2009, as the UAE and Dubai in particular are heavily exposed to the financial crisis and market volatility. Finally, the shortage in the highly skilled (project managers, engineers, architects) and unskilled labour market, in addition to recent labour unrest regarding the working conditions, have added to the problems in the UAE's construction market. .