Our baseline scenario sees relatively solid
growth over the coming quarters, with real GDP forecast to expand 3.9% and 4.1%
in 2014 and 2015 respectively. The outlook for Dubai has become more promising
relative to that for Abu Dhabi, with the former benefitting from increased
activity in the trade and tourism sectors, in addition to our expectation that
the all-important real estate industry is now on the road to recovery. Credit
growth to the private sector will remain anaemic through 2014 as commercial
banks continue to increase provisioning against potential loan losses due to
the debt funding cliff.
Major
Forecast Changes -
On the back of a stronger-than-expected
recovery in Dubai’s residential property sector, we have revised up our 2014
average inflation forecast, and now project the headline print coming in at
2.0% this year.
Key
Risks to Outlook -
Any attack by Islamist militants would result
in a fundamental reappraisal of both the UAE’s, and the wider region, risk
profile. A further uptick in tensions between the West and Iran could result in
a deterioration in the UAE’s sovereign risk profile given the close proximity
and deep trade ties between the two countries. Downside risks to oil prices in
2014 are elevated, which could undermine the UAE’s already fragile
macroeconomic recovery.
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A potential deal between Iran and the UAE
over Abu Musa and the Tunbs islands is a very positive step for the region in
reducing geopolitical risks. The deal removes of the few external risks facing
the UAE, while also indicating Iran's change towards a more accommodative
foreign policy.
The UAE is not without its challenges.
However, it is one of the more stable Gulf states over the long term, with a
small, wealthy population; no history of terrorism; and no sectarian tensions
to speak of.
We maintain our bullish outlook on the UAE's
economies as a wealth of data points to continued growth. Consumer and business
sentiment remains positive, underlining our particularly bright outlook for
household consumption and fixed investment over the coming quarters.
We hold a bullish outlook on Dubai's economy
over the coming years as a whole host of sectors possess significant growth
prospects. We expect the emirate to become an increasingly important growth
driver in the UAE as the emirate records the fastest GDP growth rates on the
back of the tourism, real estate and retail sectors.
Publisher expect Abu Dhabi to see a broad
slowdown over the coming years as gains in the crucial oil sector become harder
to maintain. We forecast Abu Dhabi's real GDP growth to reach 3.5% in 2014 and
3.2% in 2015, following an estimated 3.6% in 2013. This forecast lags our
expectations for the UAE as a whole as the non-oil sector will be unable to
maintain the former growth reached by the larger oil sector.
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We maintain our bullish outlook for the
emirate of Sharjah, largely on the back of our positive forecast for Dubai.
Sharjah will benefit from rising housing costs in neighbouring Dubai which
should push up demand for the former's own housing sector. In addition,
Sharjah's growing shipping and tourism reinforce our sanguine outlook for the
emirate.
In line with our expectations, inflation
continues to tick higher in the UAE, with Dubai leading the price rise. We
forecast inflation to average 2.0% in 2014, up from 1.1 % in 2013. The key
driver of inflation in the UAE will be house prices, as the inflationary impact
of food diminishes.
We expect 2014 to be a key year for the
global Islamic finance industry as several new markets come to the fore. It has
been our longheld view that rather than becoming an integrated global financial
system, Islamic banking will see the creation of regional hubs. Even with this
slightly fragmented outlook, we still expect significant growth for the sector.
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