Economy

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Economy

Amid sluggish growth among emerging markets, Dubai's economic star continues to burn, although all eyes are watching the health of the real estate sector.

In 2014, DED predicts growth of 4.7%, with a separate 5% prediction from the Dubai Statistics Center, and the IMF’s own 4.5% estimate. Whatever the result, growth shows no real sign of slowing, driven on by solid indicators out of 1Q2014, including a 10% rise in international passenger traffic over 1Q2014, a 17% rise in port container traffic, and 4% expansion in air cargo YoY. Looking back at FY2013 figures, a 10% rise in tourist arrivals to 11 million is also indicative of Dubai’s ambition. On top of that, the Dubai Statistics Center announced a 12% increase in the number of new trade licenses recorded over the year, as well as a jump in the number of real estate transactions by 53% to above $64.3 billion. But a rise in residential property prices by one-third in 1Q2014 prompted the IMF into issuing a warning on the potential of a bubble. Indeed, real estate consultancy Knight Frank writes that house prices climbed 27.7% over the quarter, back to pre-crisis levels in some areas. And while some investors worry not enough has been done to shore up the economy in that sense, elsewhere relics of the financial crash of 2008 can still be seen; the Emirate’s banks run an NPL ratio of 13.8%, although the figure is on the improve and the coverage ratio stands at upward of 60%. The banks’ 1Q2014 net profits also came in up 25% YoY, suggesting a sense of momentum on the consumer and commercial side, according to Forbes.

The investment scene remains buoyant, with $12 billion in incoming FDI recorded flowing into the UAE in 2013, a figure that the government expects to rise to $14.4 billion in 2014. Usually representing around 90% of the UAE’s total inflow, Dubai remains popular with investors.

This year will be punctuated by high government spending, the highest since 2008—Dubai opted to boost its budget by $10.3 billion in 2014, instead of eliminating its deficit entirely—as it looks to develop new infrastructure projects, for which the Emirate has become famous.

BUDGET

Delving into the details of the budget, spending is up 11% in 2014, its highest level since 2008. That increase can be accounted for by a 13% increase in infrastructure spending, with AED6.35 billion ($1.73 billion) earmarked for new projects. The budget is significant in that it represents the growing confidence of the government post recovery, with HE Abdulrahman Al Saleh, Director General of the Emirate’s Department of Finance, quoted as suggesting that instead of closing the deficit entirely, which was an option on Dubai’s plate, it instead decided to ramp up spending by $10.3 billion in order to support continued growth. And invest it will; AED2 billion ($545 million) alone has been earmarked to build a canal through the downtown area by 2017, in a development that will open up new waterfront for hotels, marinas, and tourist areas. To counter the rise in spending, however, is a rise in revenues, projected to rise 13% to AED37 billion ($10.8 billion) in 2014, with the Department of Finance predicting a rise in fee income, which already accounts for 67% of revenues, by up to 24% as the economy grows at large. According to the budget, Dubai will finish the year with a deficit of AED882 million, or 0.26% of GDP, down from AED1.5 billion in 2013.

TRADE

Direct foreign trade reached AED845.8 billion ($230.46 billion) in 2013, up 4.7% from 2012. Imports contributed 64.4% to direct foreign trade, exports 14.9%, and re-exports 20.7%. Imports amounted to AED545 billion ($148.50 billion) in 2013, according to the Dubai Statistics Center, up 8.6% on 2012, while exports were worth AED126 billion ($34.33 billion), down 15.1% on 2012. Re-exports were worth AED174.7 billion ($40.25 billion), up 10.8% in 2013 on 2012. That meant Dubai posted a trade gap of AED244.3 billion ($66.57 billion) in 2013, with total exports and re-exports covering 55.2% of imports, down from 61% the previous year as the value of exports and re-exports dropped by 1.8%. According to the Dubai Statistics Center, the semi-precious/precious stones & metals, imitation category dominated imports, exports, and re-exports, followed in imports by: machinery and electrical goods; vehicles, aircraft, and transport equipment; chemical products; and base metals and metal products. In export terms, other major categories were base metals and metal products; prepared foodstuffs; plastics and rubber products; and wood pulp, cork, cellulose materials, paper, and printing. A similar affair is true for re-exports, where top categories include: machinery and electrical goods; vehicles, aircraft, and transport equipment; textiles; and base metals and metal products.

Of the total direct foreign trade figure of AED845.8 billion in 2013, AED482.9 billion ($131.58 billion) was accounted for by free zone and custom warehouse trade, up 13.1% on 2012, highlighting the significance of Dubai’s extensive free zone matrix.

FDI

Some $12 billion in FDI flowed into the UAE in 2013—a figure that is expected to rise to $14.4 billion in 2014—with Dubai claiming the lion’s share. That makes the UAE the third most popular investment destination in West Asia, according to UNCTAD figures. And for those looking to invest in Dubai, the indicators look good; according to Dubai FDI, private consumption is expected to grow at an average rate of 7.8% until 2015 as disposable incomes continue to swell, the retail real estate scene expands, and international retailers continue to eye opportunities in the Emirate. In fact, with retail sales in the UAE expected to grow 32.9% to AED151 billion ($41.14 billion) in 2015, there’s no reason to fear not being able to find a market, and one that is expanding through population growth. On the property front, foreign buyers also snapped up nearly half of all real estate deals in Dubai last year, according to the Dubai Land Department. And those deals were worth over $31 billion in 2013, with Indian nationals the biggest buyers, followed by nationals from the UK and Pakistan.

Moving deeper into the second half of 2014, it’s clear Dubai is in for another positive year. And although government spending is acting as a catalyst for growth, Dubai’s robustness lies in its private sector, with 40% of the economy now made up of SMEs. Elsewhere, the Islamic economy program continues to gather pace, led by sharia-compliant banking, which has, in recent years, consistently posted growth rates between 10% and 15%. Also worth keeping an eye on are developments surrounding Expo 2020, set to be hosted in Dubai. According to DED, the Expo could add at least 0.5-0.6 percentage points to GDP growth and create more than 100,000 new jobs over the 2015-2021 period, as well as open up a multitude of opportunities for local and foreign firms.