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Fri 29 Jan 2010 04:00 AM

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Better times ahead?

As long as China keeps growing and guzzling fuel, the future looks bright this year for oil prices as well.

Better times ahead?
Figures from UAE bank Emirates NBD indicate that the GCC region as a whole is estimated to see growth of three to four percent this year.
Better times ahead?
Emirates NBD chief economist Tim Fox sees 2010 as a year of rehabilitation.
Better times ahead?
The UAE bank’s private banking CIO Gary Dugan.
Better times ahead?
A key factor for the GCC region’s economic future is the aggregate oil demand from China, which is expected to rise significantly over the next two years.


The GCC can benefit from a sea-change in the world economy and as long as China keeps growing and guzzling fuel, the future looks bright this year for oil prices as well.

Making sensible predictions about the global economy in 2010 was never going to be easy. More straightforward, perhaps, is calling the outlook for Middle Eastern economies given the touchstone of hydrocarbons reliance.

However much GCC countries are striving to diversify, confidence and sentiment is still tied in large part to the movements in the price of natural resources.

For UAE bank
Emirates NBD

, which held a roundtable last week to discuss its predictions for 2010, the emphasis was resoundingly on the bullish. Although a wider discussion on Dubai was curtailed due to the bank being in its closed period before the release of last year's results, the accent was certainly on the positive there, as well.

Of course, it's in
Emirates NBD

's best interests to keep confidence brimming, but the hard data provided also indicated that Gulf economies are still in rude health in comparison to the rest of the world as we push through into 2010.

"This will be a year of rehabilitation," says Tim Fox, chief economist at
Emirates NBD

. "But it's important to retain a degree of reality; there won't be runaway growth and it will be relatively cautious."

The bank's figures indicate that the GCC as a whole is likely to see growth of three to four percent, impressive in the context of the rest of the world, but still below the trend growth periods witnessed by the region in the years before 2008.

Breaking the numbers down further,
Emirates NBD

says the UAE will achieve 2.5 percent growth in 2010, with neighbouring Saudi Arabia - which has been less hard hit by the global recession - earmarked to see three percent growth. Top of the GCC league, as expected, is Qatar, which is likely to witness at least a ten percent rise in GDP on the back of expanded oil, and especially liquefied natural gas (LNG) exports.

Elsewhere, growth was predicted at 2.5 percent in the US, in Japan and the Eurozone at one percent, and in the UK at a lowly 0.5 percent. From the global perspective, the one to watch is definitely China, which
Emirates NBD

says is likely to hit 10.0 percent growth this year, a view echoed by other agencies. Figures released in mid-January indicate that industrial production in the Asian powerhouse rose by 18.5% in 2009, with retail sales also up by 17.5%.

Year-on-year, GDP was up by 10.7% in the last quarter of last year, leading to mild inflationary concerns, and the potential prospect of the government putting in an interest-rate rise to touch the brakes on an overheating economy. "China is propping up demand and driving recovery in the East Asia region," says Michael Dennison, research director for UK-based Control Risks. "It has also become an indispensable power in global security problem solving."

Emirates NBD

is certainly not alone in its robust assessment for the year ahead. IHS Global Insight chief economist Nariman Behravesh classes the region along with a number of other emerging markets, including Africa and Latin America, and also says it is likely to see overall GDP growth in the three to four percent range during 2010.

By comparison, the consultancy says the US will be stuck in a two to 2.5 percent range throughout the year, with Europe and Japan following on behind. The US-based forecaster also recently indicated that Dubai's sovereign risk had been "overblown", adding that its assessment of overall UAE sovereign risk had remained stable at AA "throughout the Dubai crisis, but this is contingent on successful corporate structuring in Dubai."

Emirates NBD

's Fox adds that some of the reasons for its bullish forecast were the strong indicators emanating from regional economies about their own predictions this year. In the last week or so, Qatar has estimated its own growth at eleven percent, with Oman coming in at 3.7 percent.

Predictions as to the future are all very well, but analysts are quick to point out that issues such as government actions can be swift to throw a spanner in the works. US president Barack Obama's recent proposals to curb banks' activities in order to prevent further slumps in the future may have their ultimate impact diluted via a passage through Congress, but the announcement's effects still caused havoc in the market.

"As with president Obama's statement, things can happen in the market that create volatility," explains Gary Dugan, chief investment officer, private banking, at
Emirates NBD

. "That's why what we're highlighting to our clients is the need to keep a balance of assets as we enter an environment where the emerging markets, rather than the developed world, will provide much of the growth for the future."

Dugan believes that in many respects a tipping point has been reached in the global economy. With the phrase ‘emerging markets' popping up in almost every sentence, it's clear that the
Emirates NBD

executive sees this financial crisis as switching the balance of GDP growth from the older economies to the developing nations.

"There's nothing on the horizon other than sentiment to stop emerging markets from doing well and significantly outperforming the US and European markets," he explains. "The years of the really strong growth rate in the world economy are probably behind us. Even this year, we are predicting a 10 percent rise in China but rises of around one to two percent in most of the developed markets."

He says that the US is coming off a 20 to 30 year period where it was growing at between three and four percent in GDP terms a year, but reveals that
Emirates NBD

's view, long term, is that the world's largest economy will achieve no more than two percent growth going forward.

"The days when our clients would have lots of US or European equities are long gone, and the wake-up call is that you should be in the emerging world; it's less volatile than it was in the past and a good balance of bonds and equities will serve the client well," Dugan adds.

One of the major reasons behind this sea-change is the aging populations in the developed world. Japan, in particular, has suffered over the last ten or so years, as the economy has stagnated and the numbers of those reaching retirement age has swelled in comparison to the numbers of workers that are benefitting the economy.

In contrast, many Middle Eastern countries have a ‘youth bulge' in their population pyramids, which, if activated correctly, could provide a huge stimulus to regional economies.  "So we certainly predict that the emerging markets will continue to see excess growth against the global markets, and we see no end to it," Dugan says.

Of course, the importance of hydrocarbons to the region cannot be overstated and
Emirates NBD

believes that oil price rises create a feel-good factor across the Middle East as a whole.

Dugan points out that there tend to be wildly conflicting views as to how much oil is underground, how quickly it can be taken out of the ground, and how quickly it can be refined and delivered to the end-consumer. Given the limited spare capacity globally - with Saudi Arabia almost solely having that ability to bump up deliveries on its own - much is going to rest on the Kingdom's ability to get refineries on line.

A key factor here will be China - again. With Chinese growth coming in at 10% on a yearly basis, aggregate oil demand could rise by between three and four million barrels per day over the next two years. With all that borne in mind, a return to the lower oil price territory witnessed at the turn of 2008-09 looks pretty unlikely. "The pure fundamentals of supply and demand to me look imbalanced towards excess demand, and therefore upwards surprises on oil," he remarks.

The bank's position is that 2010 could see a $90-a-barrel oil price in around the third quarter. That view is again reflected by other agencies, with Control Risks putting its money on around $80 over the course of the year. "We called the price at $70 for 2009, which people said was crazy at the time, but which turned out to be pretty much on tap," indicates Control Risks' global issues analyst Jonathan Wood, who also thinks that the upper and lower limits will stretch between $100 and $60.

But a strong oil price doesn't just provide higher revenues for the energy sector. Across the board, it creates a feel-good factor for the region as whole, with parallel benefits for the non-hydrocarbons sector, says
Emirates NBD

's Dugan, who indicates that if anything, the bank's assessment of the oil price may be a little conservative. And as Arabian Business went to press, the Abu Dhabi National Oil Company (ADNOC) announced an oil production cut for March, in line with OPEC instructions.

While the
Emirates NBD

executives are reluctant to reveal their own assessments of Dubai's performance this year, or indeed how the emirate will fulfill its financial obligations this year, they are keen to point out that there is interest in this market.

There is a slight concern, however, that the market is waiting for some sort of stimulus after a weak start to the year. Dugan points towards news reports of Chinese group First Eastern planning a $250m on fund focused on Dubai as a trading, logistical and finance centre.

"That could have a very dramatic impact in terms of sentiment here, and it could drive the market to recover from the trading pattern we've seen in recent days," he says. In terms of equities, the bank sees 2010 as being largely positive, and Dugan argues that in the GCC, these are significantly undervalued. "They need a catalyst - whether it's government policy or a spark of confidence," he says. "If we get that, then GCC and Dubai equities should do better."

So while the figures for GCC growth and that of emerging markets look good, there is less solid information about the progress of Dubai this year, despite the optimistic claims of executives at the emirate's largest bank. "The sad thing about the Dubai crisis was that we were actually starting to see an increased appetite for risk taking, but some of the announcements that were made killed that off," Dugan states.

"Having said that, since the turn of the year and the launch of the Burj Khalifa, we have started to see people come back to the bank and talk about making investments outside of the cash deposit, with added interest in the local bond markets. While I don't have any inside information [about the Dubai situation], I do sense that this economy in broad terms will find its footing, that things will start to improve and that the potential return to clients will be substantial."

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