Dubai to stay in recession for 2010 says IMF

The Dubai economy will contract by 0.5 per cent in 2010, but growth will return to 3.4 per cent in Abu Dhabi says the International Monetary Fund in its latest regional review.

With oil prices higher so far this year the IMF expects the UAE to post a current account surplus of $19.7 billion compared with a deficit of $7 billion last year. Dubai is still suffering in the wake of the world’s worst real estate crash in 2009.

Oil-fuelled growth outlook

Going forward the IMF expects the UAE economy to grow at a much faster pace thanks to high oil revenues, and once the Dubai World debt agreement is signed off. Across the region credit growth has come down from an average of 30 per cent in 2008 to low single digits, notes the IMF report.

Non-performing loans have almost doubled since then as a proportion of total loans, although at four per cent this remains low by global standards. UAE loan-loss provisions are up from $6.8 billion at the end of 2008 to $12.8 billion. This has led to a tightening of lending by the banks.

There is no sign of an end to this credit squeeze yet. Indeed, yesterday the Governor of the Central Bank, Sultan bin Nasser Al Suwaidi, said banking regulations are about to be ammended to reduce the growth in the loan to deposit ratio.

It was the sudden credit squeeze in September 2008 that crashed the Dubai real estate sector and, although liquidity has eased since then to a degree, it is still much harder for developers and end-users to obtain finance, and impossible in many cases.

Tight credit

Tighter local credit is hardly going to help the recovery of Dubai. But it is only a reflection of the mounting problems in global credit markets where the cost of interbank lending is rising again in a re-run of what happened in August 2007 and September 2008.

The IMF in its latest study seems to be kicking a real recovery someway into the future, and making it dependent on an improvement in oil prices. The 20 per cent correction in oil prices over the past month or so hardly makes that much of a cause for celebration.

Far from an imminent recovery the revival in the UAE economy in the first half of 2010 increasingly looks like the sweet spot in a double dip recession, although to be fair to the IMF it has not said that Dubai has emerged from the first downturn just yet.

Dubai can point to a recovery of tourism, aviation, hospitality and retail in the first half of 2010. But this has not offset the weakness in real estate, construction and banking. Abu Dhabi is faring better but is far from unscathed by the downturn.