Dubai Chamber analysis highlights retail growth and expected rise in US dollar and oil prices



On top of the remarkable resilience of Dubai’s trade flows to the economic slowdown, the retail sector has displayed strong growth performance, stated a recently-released analysis by Dubai Chamber of Commerce and Industry. Based on a study by Business Monitor International, the UAE ranks first in the retail business environment league table for the Middle East and Africa (MEA) region in 2010 with its strong wealth and high consumer spending leading it to outperform its regional peers.

dubaiScores range from the UAE‘s 57.5 out of a possible 100, to Bahrain’s 43.5 at the bottom in the league table. Kuwait ranks a relatively close second (with 55.7 points) but is unlikely to challenge the UAE for the top spot over the long-run given its smaller size of its retail market.

2009 has been a challenging year for UAE retailers with a weakening in aggregate demand, a tightening in accessing credit and increasing household saving rates hampering revenues. According to the UAE Central Bank, in the first five months of 2009, the value of personal loans declined by 8.3% highlighting the shrinking pool of credit available to consumers for purchases of durable goods, such as automobiles and electronics.

That said, despite the economic slowdown, shopping malls continued to expand in the UAE last year. In the first half of 2009, three main shopping malls opened in Dubai, namely, Dubai Mall, the Arabian Centre and Dubai Marina Mall. Moreover, in Abu Dhabi, at least six shopping malls are scheduled to open by 2012 which adds to the buoyancy and robust growth of the retail sector throughout the country.

According to a number of observers, shopping malls in the UAE are expected to rise significantly by 2010. Some observers have estimated that increasing market sentiment in the months ahead will lead to a rising private consumption levels, which in-turn will see the value of retail sales grow by 4% in 2010 and 8.2% in 2011. The retail sub-sectors which are forecasted to show strong growth include pharmaceuticals, automotives and consumer electronics, according to leading UAE retailers.

The key factors behind the strong growth forecast in UAE‘s retail sales in 2010 and beyond is the expected increases in household consumption, growing urbanisation, high wealth levels as well as an overall improvement in consumer confidence as the worst of the economic crisis is over. One further factor that will assist the retail sector in growing is the success of the Dubai Metro, which started some services in September 2009. With some stations located inside or adjacent to major shopping malls, retailers are expected to see sales rise significantly.

What’s more, the annual Dubai Shopping Festival which ended at the end of February 2010 was hailed a success by retailers citing both higher revenues and visitors than in 2009.

Overall, the outlook for the UAE retail sector remains positive. The UAE has clearly confirmed its position as a new force in global retailing which is clearly reflective of the nation’s appetite for international brands. As the UAE recovers from the effects of the global economic downturn, a pick-up in consumption levels on the back of higher real disposable incomes due to falling inflation, an easing in credit availability as well as an expected influx of tourists, will all help in bolstering retail sector growth in 2010 and beyond.

Historically, the value of the US Dollar (USD) has had an inverse relationship with crude oil prices, that is, the price of oil rose as the USD dropped in value. As can be seen in figure 1, the relationship between the value of USD (in this case against the Euro) and crude oil prices has been inversely correlated throughout 2009. However, since the start of 2010, both have witnessed an upward spiral and there are reasons to suggest that this trend is expected to continue throughout 2010, according to an analysis by Dubai Chamber.

Recently, the USD has strengthened rapidly against a basket of currencies as more evidence of an easing in US lending conditions, increased risk appetite and an overall rise in business and consumer sentiment levels in the US have increased the demand for USD. In relation to the Euro and GB Pound (GBP), the USD has been performing remarkably since the start of 2010 as record government borrowing in the UK and the future status of the Greek economy (given its large budget deficit) has meant investors have dumped these risky currencies in favour of the USD. What’s more, the US Federal Reserve raised the interest rates on its emergency loans in mid-February 2010 (the first time it had done so in 3 and a half years) prompting a rally in the USD.

The US Federal Reserve has been also developing a number of tools which will enable it to reduce the large quantity of reserves held by the banking system. It does this through two key methods, namely, reverse repurchase agreements or term deposits. These tools, which are in essence expected to drain reserves from the banking system are reflective of the central bank’s determination to provide sound assistance to the financial markets in order to get the economy growing again. These US Federal Reserve tools have clearly made the USD attractive for investors.

In terms of crude oil, demand is expected to rise this year on the back of the global economic recovery. With global trade rising since the last quarter of 2009, this increase in trade (notably in emerging economies) will mean increased transportation and logistical growth and thus increased crude oil demand going forward.

Crude oil prices are a major source of UAE government revenues and with prices rising strongly in the last 2-3 months and currently hovering USD80p/b compared to a low of USD32p/b in March 2009, it is clear that the UAE current account will register a surplus as this demand for crude oil drives revenue receipts upwards. This resumption in hydrocarbon receipts will certainly help the UAE to continue their implementation of investments in infrastructure projects which in turn will reignite aggregate demand for construction and contracting services, boost employment, and should provide a stronger base for the entire economy to grow further.

The most immediate impact for the UAE business community is that the strong USD will strengthen the value of the UAE Dirham (Dhs) and therefore the cost of non-USD denominated imported goods will fall. The Dhs to the USD peg is expected to lead to UAE interest rates being held at exceptionally low levels even when economic growth has resumed, adding to the upward pressure on the prices of assets and goods.

Overall, this will be an interesting year for the value of USD and crude oil price correlation. On the one hand, there are clear signs appearing that the USD is expected to strengthen this year on the back of positive economic data from the US as the economy emerges from recession. On the other hand, with strong signs that the global economy is back on the road to recovery, especially with solid aggregate demand from emerging economies such as China and India, the price of crude oil is expected to rise in 2010.