EFG Hermes forecasts bleak year for Gulf

Investment bank warns UAE, Bahrain and Kuwait are exposed to worldwide recession.
EFG Hermes forecasts bleak year for Gulf
By Soren Billing and Rob Corder
Tue 10 Feb 2009 02:04 PM

The Arab world’s largest investment bank, EFG Hermes, has issued a bleak research note on its forecasts for economies across the GCC.

The bank expects Saudi Arabia, Qatar to outperform most markets because of their oil and gas surpluses.

Oman, it says, is relatively decoupled from global turmoil, but Kuwait, Bahrain and particularly the UAE are exposed to the worldwide recession, overheated economies at home, and cyclical downturns in key industries.

Dubai will be worst hit, the bank predicts, with the real estate and tourism slump extending well into this year, and its fallout infecting the broader economy.

“Dubai is still very much at the outset of a real estate crash and the full trickle-down effects of this into the real economy have yet to be fully appreciated,” the regional investment bank said in a research note.

A company official confirmed to Arabian Business that its previous forecast of a 20 percent decline in Dubai property prices this year is currently being revised downwards.

Anecdotal evidence suggests that real estate prices have fallen by as much as 35 to 50 percent in developments such as the Dubai Marina, Downtown Burj Dubai, and the Palm Jumeirah.

“We see little support for real estate prices in the near term and a bottoming of the real estate market effectively depends on the rate at which distressed sellers exit the market,” the bank said.

In addition to the companies directly involved in the real estate and construction sectors, those indirectly involved, including banks and advertising agencies, will suffer losses as key revenue dries up.

The resulting decline in Dubai’s expatriate population represents an additional threat for the city’s economy, which is already geared towards cyclical sectors such as ports, tourism and real estate. “As a result we would describe the emirate as being hyper-cyclical,” the bank said.

EFG Hermes predicts that there could be high profile casualties in Dubai this year, as weak business practices are exposed in savage trading conditions.

“The booming real estate market was likely to have covered up a number of questionable activities and the current collapse will likely bring the high profile ones to light…At some point over 2009 we would therefore expect a shock to the system resulting in substantial downward pressure on the stock market,” EFG Hermes said.

Such an event would test the enforcement of corporate governance as well as the strength of the regulatory and legal systems.

The good news: it would also rid UAE stock markets of the uncertainty that is currently prompting investors to assume a worst case scenario. To that end, EFG Hermes believes that the earlier it takes place, the better.

EFG Hermes remains positive on the defensive telecom, consumer staple and utility sectors. It is cautious on exposure to infrastructure spend in the region during the first half of this year due to the volatile oil price.

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