Economic Outlooks for UAE, Qatar and Bahrain
FROM THE ECONOMIST INTELLIGENCE UNIT
DOMESTIC POLITICS: The political scene will remain broadly stable in 2010-11. The president of the UAE and the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, has the backing of the ruling families in the other six emirates, including the ruler of Dubai and prime minister of the UAE, Sheikh Mohammed bin Rashid al-Maktoum. Sheikh Khalifa also enjoys the support of his half-brother and designated crown prince, Sheikh Mohammed bin Zayed al-Nahyan, a younger, more dynamic figure, whose growing influence over policymaking has been apparent in the acceleration in the pace of reform and economic development in Abu Dhabi. Sheikh Mohammed bin Rashid’s reputation as the architect of Dubai’s emergence as a regional and global business centre has been tarnished by the emirate’s need to reschedule its debts. Owing to Dubai’s severe debt problems, and repeated financial aid from Abu Dhabi to prevent it from defaulting, Abu Dhabi is expected to exert its influence more forcefully in federal affairs at the expense of Dubai.
INTERNATIONAL RELATIONS: Reports of a recent naval clash between the UAE and Saudi Arabia, over a border dispute, have exacerbated tensions between the two countries. The UAE’s response to the confrontation, which stems from lingering resentment at aspects of the 1974 border agreement between the two countries, signals a desire on the part of the UAE to challenge the overweening role that Saudi Arabia plays in the Gulf Co-operation Council (GCC). However, Saudi Arabia remains the UAE’s most important neighbour in the GCC and supports the UAE in its dispute with Iran over the Abu Musa islands. Outside the GCC, the UAE recognises the importance of diversifying its relations with economies other than the US. The recent docking of two Chinese warships at Port Zayed in Abu Dhabi and the establishment of a French naval base in Abu Dhabi are testament to this. The UAE’s foreign policy will continue to be based on its close strategic relations with the West, but Asia, especially China and India, will play an increasingly prominent role in the region.
POLICY TRENDS: Economic policy in the first part of the outlook period will concentrate on restoring confidence in the UAE economy, with a focus on Dubai, which has suffered a severe blow to its reputation, following its request in November 2009 that creditors of Dubai World, an investment arm of the Dubai government, accept a “standstill” on debt-service payments. The Dubai government took a step towards restoring investor confidence in March by announcing plans to pay back Dubai World’s debts in full over five to eight years. The debt crisis has also fostered federal unity, prompting Abu Dhabi and Dubai to merge their stock exchanges to enable the UAE to promote itself as the primary market for access to the oil-rich Gulf region. Abu Dhabi will press ahead with economic diversification, including stepping up infrastructure spending to tackle the strain caused by the rapid economic expansion of recent years. The emirate will also intensify efforts to boost gas production, to meet power and industrial demand. Abu Dhabi National Oil Company (ADNOC), the state-owned oil company, has entered into a partnership with a US firm, ConocoPhillips, to develop the US$10bn Shah gasfield. However, ConocoPhillips has yet to make a final decision on whether to invest in the project and its recent decision to withdraw from a major refinery scheme in Saudi Arabia raises questions about its continued involvement in the Shah gasfield.
INTERNATIONAL ASSUMPTIONS: The global recovery is continuing and positive data for a number of countries have led to a marginal upward revision to the Economist Intelligence Unit’s forecast for global GDP growth in 2010, adjusted for purchasing power parities, to 3.9% (from 3.8% previously), largely reflecting better growth in emerging markets. Although the worst of the crisis is over, our view is that recovery continues to be driven by temporary factors. Fiscal consolidation, household retrenchment and banking sector balance-sheet repair will constrain growth in some economies. We continue to forecast that global growth will weaken, to 3.5%, in 2011, as private-sector demand will not be strong enough to offset fading stimulus. With growth expected to pick up in 2010, average oil prices (for Brent Blend) are forecast to reach US$77/barrel, before falling slightly to US$73/b in 2011, when there could be a slowdown in demand in some large markets, such as the US.
ECONOMIC GROWTH: Data from the Central Bank of the UAE put real GDP growth at 7.4% and nominal GDP growth at 23.2% in 2008. Data indicate that the slowdown in the economy began in the latter part of 2008, spilling over into 2009, when the global recession hit the UAE hard, resulting in a sharp slowdown in construction activity. In addition, OPEC-mandated cuts and a decline in oil prices affected exports. The announcement by Dubai World of a standstill in debt obligations in November further added to the UAE’s woes, although the Dubai government has since presented its plan for restructuring Dubai World’s debt. We estimate that real GDP contracted by 2.7% in 2009. A gradual increase in oil production, an increase in oil prices and a pick-up in infrastructure projects are expected to lead to growth of 2.6% in 2010. The economy should pick up pace in 2011, although we expect only a modest increase in oil production owing to a slow recovery in demand. We forecast that real GDP will grow by 3.5% in 2011.
INFLATION: Inflation averaged 3.4% in the first half of 2009, but has fallen substantially. We estimate that it averaged just 1.5% for the year, as economic activity was weak and housing supply increased. However, from mid-2010 rising domestic demand, a weak US dollar and higher commodity prices will push up inflation, which is forecast to average 4% in 2010, before falling to 3.2% in 2011. We do not in general use official data for our inflation forecasts, as they reflect prices paid by the minority Emirati population, which benefits from a wide range of subsidies. However, new official data have been released that rebase the basket of consumer goods to 2007, as part of an effort to harmonise methodologies across the GCC.
EXCHANGE RATES: The UAE dirham’s peg to the dollar (at Dh3.673:US$1) is expected to remain in place in 2010-11. The recovery of the dollar since mid-2008 has made it even less likely that the peg–which the UAE has maintained since independence in 1971–will be broken or the currency revalued. The Central Bank remains committed to the existing system. The peg has provided stability for decades, and, having ridden out the problems that a fixed currency brings for this long, the authorities seem keen not to change the system. The UAE’s withdrawal from the GCC monetary union project has no immediate implications for the exchange rate over the forecast period.
EXTERNAL SECTOR: Abu Dhabi and Dubai released headline figures for foreign trade in 2009. Dubai’s exports declined by less than 1% compared with 2008, which was mainly attributable to an 8.6% fall in re-exports, which contribute almost 70% to total exports. Abu Dhabi’s exports also fell, by 8.7%, primarily because of a reduction in oil prices and OPEC production cuts. We estimate that export earnings for the UAE fell by around 27% in 2009, to US$174.7bn. Import spending also declined in 2009, although by less than exports, leaving an estimated trade surplus of US$30bn. The trade surplus will widen in 2010-11, as oil exports increase in response to rising demand from Asia. The invisibles balance will remain in deficit, although the shortfall will be smaller than in the years before the financial crisis. The fall in earnings from exports and in returns on the UAE’s stock of foreign assets will be accompanied by lower outflows, particularly of remittances, as growth in the number of foreign workers in the UAE slows. Overall, we estimate that the current account will show a deficit of US$4bn (1.8% of GDP) in 2009, but forecast that it will return to surplus in 2010-11, with the surplus averaging US$6.1bn a year, or 2.3% of GDP.
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DOMESTIC POLITICS: The Economist Intelligence Unit expects Qatar to remain stable and secure under the rule of the emir, Sheikh Hamad bin Khalifa al-Thani, in 2010-11. There will be little vocal opposition to his rule and economic policies, largely because the government has ensured that most Qatari citizens have benefited from the wealth that the country has generated over the past decade. An electoral law was passed in May 2008 that settled a number of disputes about the franchise and paved the way for the creation of a two-thirds elected Advisory Council with limited legislative powers, although the term of the current (fully appointed) Council was subsequently extended until June 2010. The Council’s term will almost certainly be extended once again, but even if an election is held, the ruling family will maintain its hegemony over policymaking because of the limited powers granted to the Council by the 2005 constitution.
INTERNATIONAL RELATIONS: Qatar will maintain its high-profile foreign policy, spearheaded by Sheikh Hamad bin Jassem. By using its web of myriad (and, at times, conflicting) alliances in the region and beyond, Qatar has projected itself as an impartial mediator in many of the region’s conflicts, often backing up its efforts with financial assistance. Although its mediation efforts were successful in Lebanon in 2008, and its efforts in the Darfur conflict in Sudan appear to be making headway, Qatar’s involvement in Palestinian affairs has been controversial. Its high-profile diplomatic engagement on multiple fronts also increases the risk of straining relations with allies that disapprove of its policies or feel that Qatar is interfering in their own spheres of influence.
POLICY TRENDS: In spite of the global squeeze on credit, Qatar is pressing ahead with infrastructure projects (such as a causeway to Bahrain and a railway network) and expanding its liquefied natural gas (LNG) production capacity, to 77m tonnes/year (t/y) by early 2011. A moratorium on signing new gas export agreements is in place, until at least 2013, and will only be lifted on the basis of the results of a study into the North Field’s long-term potential and projections of global gas demand. Qatar has traditionally used loans and bonds to finance economic development projects, and a number of major Qatari firms successfully tapped credit markets in 2009 for both refinancing and expansion. However, if any key projects faced delays owing to an unavailability of credit, the government would draw on its sovereign wealth fund, the Qatar Investment Authority (QIA), to ensure that they proceed as planned. (Qatar began the development of its LNG programme during the 1997-98 oil price crash and so has positive experience of investing through downturns.)
INTERNATIONAL ASSUMPTIONS: After contracting by an estimated 0.8% in 2009, the sharpest decline since the 1930s, world GDP (at purchasing power parity rates) is forecast to expand by an annual average of 3.7% in 2010-11. However, growth will slow in some OECD economies in 2011 after government stimulus spending has run its course. The pace of the global recovery will have a significant impact on the volatility of oil prices, and we forecast that dated Brent Blend will average a relatively strong US$75/b in 2010-11. Natural gas prices, however, are diverging from their long-run relationship to oil prices because of a glut in the supply of gas, owing in part to new capacity in Qatar and the fact that there is no OPEC-style gas cartel to boost prices by cutting production. As a result, they are expected to remain weak over the forecast period.
ECONOMIC GROWTH: The government is expected to maintain high levels of capital spending on education, health and transport. Population growth is projected to remain strong over the forecast period owing to immigration, although at an annual average of 6% it will be well down from its peak of 17.9% in 2007. This in turn will support domestic demand. Growth will benefit from high levels of investment in the hydrocarbons sector, but will be dampened by imports needed to develop Qatar’s energy facilities and upgrade its infrastructure. Overall, we expect real GDP growth to surge to 23.3% in 2010, as LNG production nears its planned capacity, and then to drop to 12.7% in 2011.
INFLATION: A period of high inflation came to an abrupt end in 2009, when we estimate that deflation averaged 4.9%, owing largely to a fall in rents and global commodity prices. In 2010-11 consumer prices will begin to rise again, as demand from the ongoing influx of immigrants outweighs any further declines in rents; consumer price inflation rose marginally, to 0.1% year on year, in March. Ongoing volatility in the US dollar will influence short-term imported inflation. We expect inflation to average 2.7% over the forecast period, close to Qatar’s long-run average. There are both downside and upside risks to the forecast, depending on the level of immigration and the outlook for the dollar.
EXCHANGE RATES: The Qatari riyal is pegged to the dollar at a rate of QR3.64:US$1. The authorities are committed to maintaining the current exchange-rate regime, arguing not only that Qatar’s gas and oil exports are denominated in the US currency, but also that the peg offers stability and reassurance to investors. Pressure for revaluation is unlikely to return unless the dollar weakens substantially later in the forecast period, although the constraints that a peg imposes on monetary policy remain problematic. The peg is likely to remain in place until the GCC decides on a co-ordinated move in preparation for the establishment of a single currency. Although both Oman and the UAE have withdrawn from the monetary union project, Qatar is still committed to it, and our core scenario is still that it will go ahead. The monetary council (the precursor to a central bank) is expected to come into being during 2010, although monetary union is unlikely to happen until late in 2011, if then.
EXTERNAL SECTOR: After narrowing sharply in 2009, the current-account surplus will reach new highs over the forecast period, of US$21.8bn (19.2% of GDP) in 2010 and US$38.3bn (27.7% of GDP) in 2011. The surplus will be driven by strong export earnings growth, of a projected average of 55% a year, and relatively flat imports, as rising demand for consumer goods from a growing population only just offsets falling capital goods imports as the gas industrialisation programme begins to wind down. The increase in exports will be driven mainly by the coming on stream of new LNG, GTL and oil production, causing the trade surplus to triple to US$36bn in 2010 and to increase further to US$54bn in 2011. With workers’ remittances rising and income debits surging as foreign companies’ profits recover, net non-merchandise outflows will remain substantial over the forecast period. There will also be an increase in services debits, particularly those related to transportation.
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DOMESTIC POLITICS: In 2010-11 the rule of the king, Hamad bin Isa al-Khalifa, is expected to remain broadly secure, with the Al Khalifa family retaining control over the executive, and the legislature remaining weak. Nonetheless, there will be underlying tensions over economic inequalities, the halting pace of political liberalisation and perceptions of sectarian discrimination, and social unrest is likely to persist, especially around the 2010 election. Many of the country’s Shia Muslims, who form a majority of the population, say that they are economically and politically marginalised by the Sunni Muslim ruling family, which holds most of the important cabinet posts. There is also a widespread belief among Shia Bahrainis that the government is fast-tracking citizenship applications for Sunni expatriates in order to alter the country’s demographic balance. Such claims are hard to verify, but the perception will contribute to social unrest. Sectarian strains will be exacerbated from time to time by conflict between Sunni and Shia groups abroad and by the regional competition between Saudi Arabia and Iran.
INTERNATIONAL RELATIONS: The US will remain a key international ally and is expanding the onshore facilities used by the US Navy’s Fifth Fleet. The UK remains another influential political ally and business partner, and France is seeking to step up its political and trade relations. The alliance with the US helps to guarantee Bahrain’s security against potential threats from other states. However, the presence of the US Navy could make Bahrain a target for militant attacks, although this risk has so far been contained. The main foreign policy concern will be Iran’s nuclear programme. Tensions in the Gulf will rise as major international powers seek to increase pressure on Iran to suspend uranium enrichment. Bahrain will seek to maintain an outwardly friendly relationship with Iran, but officials harbour doubts about Iran’s respect for their country’s sovereignty, stoked by sporadic suggestions from Iranian opinion-formers that Bahrain’s mostly Shia population would prefer to be part of Shia Iran.
POLICY TRENDS: Economic policy will remain focused on efforts to attract more foreign investment to Bahrain and improve the local skills base. These policies are driven by the need to diversify the economy away from oil, stimulate private-sector growth and foreign investment, and address unemployment among nationals. “Bahrainisation” quotas for employing nationals have not solved the unemployment problem and so the government is pursuing other initiatives, including a 1% levy on salaries to fund an unemployment insurance scheme and a levy on employers for each expatriate they employ, which finances training for nationals. From August 2009 expatriate workers have had greater legal freedom to change jobs, which should slowly contribute to narrowing the cost gap between them and nationals, although there are questions about implementation.
INTERNATIONAL ASSUMPTIONS: The global economic outlook continues to improve and a number of developed economies are now emerging from recession. However, the Economist Intelligence Unit remains concerned about fiscal sustainability in several countries. Growth in the US is forecast to weaken again temporarily in 2011 as the impact of the fiscal stimulus dissipates and the effects of monetary tightening–which we expect to begin in the second half of 2010–are felt. As a result, we project that the price of dated Brent Blend will fall in 2011 after a strong rise in 2010, with knock-on effects for Bahrain’s exports and government revenue. We forecast an aluminium price of US$2,245/tonne in 2010, significantly higher than our estimate for 2009. The fallout from Dubai’s debt restructuring may have weakened investors’ risk appetite for government-related entity debt but has not deterred them from taking up sovereign debt in Bahrain as well as other Gulf economies.
ECONOMIC GROWTH: Growth will average 4.1% in 2010-11. We estimate that lower regional growth and a slowdown in foreign investment and trade flows reduced economic growth sharply in 2009, to 2.9%. Employment rose in 2009 but at the slowest rate since 2002, according to the Labour Market Regulatory Authority. Unemployment, a lagging indicator, is likely to climb in 2010. The number of Bahraini nationals in employment fell by 2.5% year on year in the fourth quarter of 2009, and this is likely to have had an adverse impact on private consumption as Bahrainis are more likely to spend their wages within Bahrain than expatriates, who typically remit some of their earnings abroad. Government spending was a vital support to growth in 2009. The government is likely to maintain an expansionary fiscal policy in 2010 but to begin to rein in spending–in real terms–in 2011 as private investment picks up. Investment will be underpinned by government spending in 2010, but as the global economic recovery continues, foreign investment should rise in 2011, particularly into services sectors catering to the regional market.
INFLATION: With economic growth expected to be lower than during the recent oil boom, annual average consumer price inflation is forecast to remain contained at 3.5% in 2010 and 4% in 2011, compared with an estimated 3% in 2009. The official consumer price index is widely believed to understate price pressures. The main risks stem from the medium-term trajectory of the US dollar (and thus the Bahraini dinar) against the euro and other world currencies.
EXCHANGE RATES: Bahrain intends to enter into a currency union with Kuwait, Qatar and Saudi Arabia, and a joint monetary council was established in 2010 as a precursor to a single central bank, a process ratified by parliament in November. The introduction of a single currency is likely to take several years, as the member states pursue convergence on inflation and seek a consensus on the functions of the planned central bank. Meanwhile, the Central Bank of Bahrain is expected to maintain the dinar’s peg to the dollar at the rate of BD0.376:US$1 that has been in place for over two decades.
EXTERNAL SECTOR: The current-account surplus is projected to narrow from 7.4% of GDP in 2010 to 5% of GDP in 2011, based on our oil and aluminium price forecasts. Oil price trends will remain the main determinant of the trade balance, with oil accounting for around 80% of export earnings and over half of the import bill. We expect the price for Bahrain’s main non-oil export, aluminium, to rise to US$2,262/tonne in 2010-11 from US$1,707/tonne in 2009, contributing to the trade surplus in 2010-11. Though expected to remain healthy over the forecast period, the trade surplus is projected to narrow gradually as imports grow faster than exports. However, the services surplus is projected to widen as services exports grow faster than the small Bahraini market’s services imports. The income balance will remain in deficit as profit repatriation and debt interest payments outweigh dividends from foreign assets, and the current transfers deficit, which mainly reflects outward flows of workers’ remittances, will widen as the number of expatriate workers rises further.
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