By Shane McGinley
UPDATE 1; Shuaa Capital says population fell by 9% in 2009, further 3.6% decline to come.
The Dubai economy is forecast to remain in recession in 2010, the second year in a row that the emirate has experienced negative growth, according to research released on Monday by a major Dubai-based investment bank.
The ‘UAE Vision 2010’ report, which was published by Shuaa Capital, said the Dubai economy would contract by 0.4 percent year-on-year this year, following on from a five percent yearly contraction last year.
This was mainly due to declines in residential sale prices and the emirate’s population, which have fallen by around 60 percent and nine percent respectively.
However, Shuaa expected the UAE economy as a whole to emerge from recession this year. GDP is forecast to grow 2.5 percent, a turnaround from the 3.5 percent year-on-year contraction it recorded in 2009.
A recovery in oil prices will also see Abu Dhabi emerge from recession this year and register GDP growth of 1.4 percent, compared to a contraction of 2.7 percent in 2009.
“The capital will benefit from a recovery in oil prices and output this year, as well as strong growth in the non-hydrocarbon sector, which will be supported by government investment and spending," said the report’s author, Mahdi Mattar, head of research and chief economist at SHUAA Capital.
"Meanwhile, we anticipate Dubai’s economy to contract 0.4 percent year-on-year in 2010, as the key construction and real estate sector continues to be a drag on growth in the emirate.”
The report said it expected the UAE capital markets to grow by up to 25 percent this year. A resolution of the Dubai World debt story will be the main catalyst for this growth, believes Mattar.
“In six months we will have a resolution and [it] will not be a hostile resolution. The main assumption behind this statement is because the Dubai government is doing the negotiation and not Dubai World the commercial entity.
“The Dubai government is taking a broader picture when doing the negotiations and is looking at the effect on the economic growth in Dubai and the effect on the reputation of Dubai with international capital markets and local banks,” he adds.
Mattar said he believed the resolution will not be as hostile as the market is currently predicting and once this uncertainty is removed the capital markets will recover.
In the real estate sector, Shuaa expected Dubai to see another 10 percent drop in residential sale prices, mainly due to a drop in demand as a result of the continued decline in the expatriate population.
Shuaa estimated that the emirate’s population shrank by nine percent in 2009 and will decline by another 3.6 percent this year.
An additional 26,650 apartments and villas are expected to enter the Dubai market in 2010, which will put more pressure on the oversupply issues that already exist.
In Abu Dhabi, Shuaa expected the residential shortage to continue, despite the addition of 23,000 extra units expected to enter the market over the next two years.
The capital was also unlikely to see the steep price and population drops experienced in Dubai, the report said.
In the banking sector, customer deposits are expected to rise eight percent, resulting in an additional net increase in liquidity of AED84bn. Lending is not expected to match deposits and will likely to only see six percent growth.
Banks are expected to see a recovery in earnings of up to 10 percent. However, this is following a 15 percent decline seen throughout 2009.
Non-performing loans (NPL) are expected to account for eight percent of loans in 2010, although Mattar believes that this year the focus of the NPLs will move away from consumer loans and mortgages and more towards outstanding corporate debts.