By Mohamad Al Kady www.business24-7.ae
Dubai’s gross domestic product (GDP) is projected to grow 1.6 per cent this year to Dh254 billion and increase by 4.7 per cent in 2011 to reach Dh266bn, according to Citigroup’s Macro View Report.
By 2012, Citi estimated, Dubai’s GDP will jump by 6.3 per cent to Dh282.8bn. However, the report sees short-term pain due to the downturn in real estate sector as well as a reduction in investment and knock-on effects on consumption.
“Despite this, we see compelling reasons for optimism with regards to Dubai’s growth prospects going forward,” Farouk Soussa, Citi Chief Economist for the Middle East, wrote in the report.
“The recovery in the global and regional economy is set to benefit Dubai as a regional hub. Dubai’s competitiveness in this regard is well established and is the result of more than five decades of sound economic policy. Moreover, its competitiveness has received a boost thanks to the real estate correction, which has removed supply-side bottlenecks and improved the city’s affordability.”
He expected that the non-real estate sector, which accounts for around 75 per cent of the economy, will lead Dubai’s GDP growth. “This sector is underpinned by competitive advantages, such as Dubai’s location and infrastructure, and has the potential to lead a strong recovery in the near term, in our view. We conclude that Dubai’s growth dynamics remain robust, although the unsustainable double-digit growth of the boom years is not likely to return in the medium term.”
Soussa draw a rosy picture of medium-to-long-term recovery in Dubai based on a wide range of expectations that the GCC will be among the first to recover from the global financial crisis and Dubai’s position as a regional hub will benefit from regional growth prospects.
“Regional economies are set to grow at almost double the global average over the next five years, and the relatively low penetration of financial, ICT (information and communication technologies) and business services in these economies will likely continue to represent clear opportunities to local and international businesses,” he said. Citigroup’s estimates are based on similarity between Dubai and other small open macro-economies such as Hong Kong and Singapore.
“Consumption and investment are of a comparable order of magnitude in GDP across all three countries (around 70 per cent and 25 per cent respectively), although external trade is a much more important component of GDP in Singapore and Hong Kong than it is in Dubai.”
Though the report estimated a drop of 14 per cent in the consumption in Dubai last year, it predicted a good recovery in the near future along with the recovery in global economy. “International business will likely once again seek out opportunities to invest in the region, and Dubai looks well-poised to benefit from this. Population growth should be supported by this, propping up demand. We believe our forecasts for consumption growth are conservative, at 1.1 per cent in 2010, and just under four per cent in 2011, leaving total consumption in 2012, still six per cent below 2008 levels in real terms.
“We believe the medium-term outlook for consumption growth and external demand is positive. Dubai’s position as a regional hub and its competitiveness should allow it to capitalise on the resurgence in global commerce and trade. We think regional growth will re-ignite global business interest in relocating and expanding in Dubai.
“Economic sectors related to domestic consumption and external demand stand to benefit. Sectors such as tourism, travel, logistics and transportation should be supported by the resurgence in external demand. We expect the performance of the domestic retail sector will also improve as domestic consumption rises,” it said.
The report also highlighted estimates of a strong surplus in Dubai’s trade balance in the coming years as a main factor of the positive GDP growth rates. “Fifty per cent of Dubai’s exports are destined for markets in South and West Asia, principally Iran, Pakistan, and India, which the IMF expects to grow at an average rate of seven per cent per year over the coming five years. Exports to these markets had been booming prior to the global recession, at an average rate of 27 per cent per annum between 2006 and 2008, and thus our assumption of 10 per cent per year in 2010-2012 looks conservative on historical standards. Import growth will likely slowdown from now on, widening Dubai’s trade surplus in the medium term.”
Despite Soussa being positive in his outlook of Dubai GDP, he highlighted some external risks. “We think the European sovereign debt crisis, concerns over the sustainability of China’s growth, the outlook for commodity prices and regional geopolitics will have a bearing on Dubai’s economy.”
Dubai’s premier status here to stay
The Citigroup report stressed that Dubai’s status as the premier regional hub will remain and will continue to serve the emirate well in the future.
Despite citing competition from other GCC cities, Farouk Soussa highlighted Dubai’s superiority in many aspects that should allow it to out-compete other regional cities in the foreseeable future. These factors include its infrastructure, working and lifestyle environment and its first-mover advantage.
“[The] Jebel Ali Port is one of the most important stops along shipping lines between Asia and the Emea (Europe, Middle East, Africa) region, making it the world’s sixth busiest container port. Dubai’s airport is the world’s third busiest for both international passenger and freight. The airport also serves numerous flights to regional commercial capitals, giving companies based in Dubai access to a combined market of almost two billion people within a five-hour flight [time],” he wrote.
The report explained that the airport, particularly since completion of the new Terminal 3 building, has greater capacity and is more efficient than any other airport regionally. Jebel Ali port is the largest and most modern container port in the region by some distance. Dubai’s roads, once traffic clogged, have received a substantial upgrade in recent years.
The total length of asphalted road in Dubai more than tripled to over 10,000km between the end of 2007 and the middle of 2009, according to the Roads and Transport Authority (RTA). In September 2009, services began on the region’s first urban light-rail network – the Dubai Metro.
The GCC region, as a whole, is an attractive destination for expatriate workers. But Dubai came 75th on Mercer’s Quality of Living Worldwide City Rankings 2010, the highest ranking for a city in the Middle East and Africa region.
The UAE as a whole was ranked highest among all GCC countries in the Economist Intelligence Unit’s Quality of Life Index (2009), achieving 15th place globally. Dubai is home to more hotels, shops and malls than any other Gulf city.
It is a common misperception that Dubai’s success is a recent phenomenon. Many outside the region may not have heard of Dubai until recently, but Dubai’s leadership has been pursuing economic policies to diversify the economy and position it as a regional hub for at least the past 50 years.
Crisis boosts Dubai’s competitiveness
Though Citigroup’s report reviewed the impact of the global financial crisis on Dubai’s growth in the near future, it stressed that the crisis supported Dubai’s competitiveness on the long-term. It cited several areas that will ensure Dubai’s superiority and attractiveness, including the affordable property prices and rental rates as well as stability in prices.
“The property market correction in Dubai has boosted the emirate’s competitiveness as a regional hub in at least two important ways. First, by creating over-capacity in the economy, they have eliminated some of the supply bottlenecks. Second, and related to this, the cost of living and doing business in Dubai has come down, and is likely to be more stable going forward,” it said.
Farouk Soussa says that the oversupply in the property sector, while bad news for the real estate industry, is good news for business. “During the boom time, companies relocating to Dubai found it difficult to find quality office space, and moving staff to the emirate was made difficult by a lack of housing. This has changed. According to data from Jones Lang Lasalle, current vacancy rates for commercial office space stand at 35 per cent. This means there is plenty of headroom for new businesses to set up shop in Dubai, and for existing ones to upgrade and expand operations.
Similarly, the current housing stock in Dubai is estimated at 278,000 units, and will increase by 15 per cent to 320,000, providing ample stock for new residents.”
The stability in prices will also increase Dubai’s attractiveness as a regional base. Aside from the level of expense of doing business, a key deterrent to investment decisions is the predictability of the cost base going forward. The growth in rental rates, accompanied by consumer price inflation in the double digits, had made for a great deal of uncertainty, which hindered investment decisions.
Soussa also highlighted the good level of affordability as an advantage to reverse the flow of residents back to Dubai. “During the boom, lack of affordable housing had forced a large number of Dubai’s workforce to more affordable residential elsewhere.”