UAE recession a sign of the times

Posted on 29 September 2009 with no comments from readers

The admission by the Governor of the UAE Central Bank Sultan Al Suwaidi that the economy could well be moving into ‘negative growth’, or recession in other words is a sobering moment when some headlines still read ‘UAE economy gears up for strong revival’.

A painful acceptance that the oil boom that peaked with $147 oil in July 2008 is over does not chime with the marketing hype of the nation. Yet if you look around at the abandoned construction sites, lack of traffic, lower consumer spending and the constant redundancies it is obvious that reality is not quite as advertised.

Recession forecast

EFG Hermes forecasts a four per cent contraction and Credit Suisse minus 2.5 per cent. HSBC is more optimistic with 1.5 per cent growth for 2008.

The money supply contraction over the summer months tends to support the Governor’s view point, but nobody doubts that the oil boom is over. Mr. Al Suwaidi also said that 13 local banks are owed money by the financial empires of Saad Group and Algosaibi without naming a figure.

He also promised to keep interest rates down and said that the new mechanism for fixing Eibor rates would lower rates from this Thursday.

For anybody hoping that the UAE would prove immune to a global financial crisis this is all very disappointing. The reality is that the UAE borrowed and geared up its economy in the boom just like other countries around the world.

The credit crunch of last September brought this party to a sudden end and the authorities have been handling the consequences ever since. The oil price is also down and output lower, so that has reduced the national cash flow too.

Dubai crisis

But it is the unwinding of a leveraged economy that is causing the most pain, particularly in Dubai where cancelled and abandoned construction projects out number those still being built.

There has been a knock-on effect across the business spectrum from a collapse in advertising expenditure for publishing companies to a freeze on garden spending for Pakistani gardeners.

How long the recession will last in the UAE is another matter. The country has huge reserves – both financial and hydrocarbon – that it can draw upon to get back on its feet.

In no other country of the world, perhaps, is there more reason to expect a recovery. But that will still take time and depend crucially on the health of the global economy and the price of oil. A longer global recession will keep oil revenues down, and lengthen the time it takes to sort out the bubble that has burst in the UAE.

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