How long will it take the UAE to turn its economy around?

For the past two years the United Arab Emirates has been a regional laggard in GDP growth, with a very large contraction of GDP in 2009 probably understated leaving the recovery last year also largely invisible in official statistical series.

Yet before the global financial crisis the UAE ranked up with Qatar as the fastest growing of the Gulf States and Dubai could boast arguably the highest rates of GDP growth in any city of the world from 2003-8.

All good things have to come to an end, and the Dubai property boom turned into an investment mania in the later years. Abu Dhabi decided to join the real estate party late in the day and so suffered from the same collapse but from higher valuation levels.

Manageable debts

It has been painful all round. Debts ballooned in Dubai in the boom period to more than $110 billion for government-related entities alone, according to the IMF. Add bilateral company debts and those run up in the other emirates and the UAE has a big debt mountain. But as a percentage of GDP and in comparison to the asset base of the country that debt is far from impossible to handle.

Indeed, many Western countries would happily change places. The sovereign wealth funds of Abu Dhabi, let alone the eight per cent of global oil reserves in the ground are ample cover for this debt, many, many times over. And total debt as a percentage of GDP is massively short of the 300-450 per cent levels found in some major Western nations.

It is a matter of reshuffling the pack locally. Those with cash to hand are now starting to pick up distressed assets from the most indebted and bail them out. The most recent examples are the buying of assets from Aldar Properties by the Abu Dhabi Government, and the purchase of the Ritz-Carlton hotel in Dubai by an unnamed Abu Dhabi buyer.

The $24.9 billion deal on the Dubai World conglomerate is agreed but not yet signed off. Dubai World is the owner of Nakheel, the developer of the abandoned Jebel Island Palm Island and The World, a $2 billion group of manmade islands off the Dubai coast. Work on these projects is not scheduled to resume but construction of more modest villa schemes is supposed to restart soon.

$100 oil

However, what will get the UAE moving faster than anything is a higher oil price. $100 plus oil is great news for cash flow and trade from Dubai as well as regional tourism, already getting a boost in the UAE from unrest in Egypt and Lebanon. The latter could also bring a certain amount of safe haven investment from worried Arab investors, helping to boost demand for local real estate and equities.

What is lacking is confidence. Local business is unsurprisingly cautious after the recent bust, and happy to benefit from lower property rentals rather than chase up selling prices. Local stock market investors seem to fear a further round of global financial chaos and what that might mean for local business rather than see stock prices as at a low point in the cycle.

It may take sometime for the dirham to drop and for investors to see the recovery for what it is, but there is no reason to think the historically high growth rates of the UAE will not return in due course as all the factors that created them in the first place are still there: a highly educated, mainly expatriate population on short labour contracts with low energy prices, excellent infrastructure, and the advantages of a regional trading and financial hub.