The UAE and the emirate of Dubai in particular are likely to experience a mini-boom as a result of the regional situation. There are two main competing effects on the Dubai economy that:
- Regional investors will move capital to more stable parts of the region, with Dubai likely to be the main beneficiary. This will lead to increased deposits in Dubai banks, which we estimate are likely to increase by between 8 and 12 per cent during 2011. Coupled with higher oil prices, local banks are expected to be able to substantially increase lending.
- The regional unrest will have a negative effect on the Dubai economy as non-regional investors are likely to stay clear of increasing their regional exposure as a whole. Painting the whole region with the same brush will likely have a negative impact, particularly on non-regional investors.
Overview Economic implications of regional unrest
Regional unrest is having an economic impact on the economies of regional states, including the UAE. The effects can be summarized as follows:
- Investors from the region (regional investors) have been moving capital from less stable countries to more stable ones. The UAE is seen as one of the region’s most stable and Dubai banks in particular will likely see an inflow of money. Much of this will be so-called “hot money” that will be taken out after the unrest subsides. However, with the regional unrest likely to continue for several months, outward movement of capital is unlikely during 2011. We estimate that deposits will increase by between 8 and 12 per cent in 2011.
- Businesses, including financial institutions and other service industry businesses are likely to relocate to Dubai from other parts of the region. This is because Dubai offers the infrastructure, capacity and ability to host those businesses. Although some will relocate on a temporary basis, others are likely to remain in Dubai. We estimate that between 30 and 50 per cent of business that relocate to Dubai will remain on permanent or semi-permanent basis. Whilst some larger businesses may opt to return to countries, like Bahrain, after the return of normality, some of those will likely only return partially, whilst maintaining the bulk of operations in Dubai.
Impact on and of oil prices
Figure 1: Break-even price of oil for 2011 (Political Capital estimate)
Oil prices have risen to well above the break-even average for all GCC states, and are expected to remain higher until the end of 2011. Figure 1 shows Political Capital’s estimate of the break-even price for oil across the GCC. It should be noted that the break-even price will likely increase by between 10 and 15 percent for the whole of the GCC, in view of increased public spending as well as an increase in military expenditure.
According to the US Energy Information Administration, the probability that the monthly average price of WTI crude oil will exceed $110 per barrel in December 2011 is about 36 percent and that the probability that the monthly average December 2011 WTI price will fall below $90 per barrel is about 34 percent.
It can therefore be concluded that higher oil prices will result in greater liquidity to local UAE banks, further contributing to easing the ability to lend.
Impact of real-estate sector
Although the real-estate sector in Dubai has been largely the subject of linear supply and demand calculations, the regional unrest will add additional layers of complexity that will make linear simulations misleading. Added to this, are plans that the Dubai government Real Estate Regulatory Authority announced that it will review the construction of 90,000 housing units.
The combination of political, economic and regional factors are likely to have a net positive effect on the real-estate sector in Dubai. Although there will be a negative effect as a result of additional residential units brought on the market, the positive effect of population increase, increased business activity and higher bank liquidity will likely cancel out any negative impact. Combined with a reviewed government policy that takes into account the changing regional geo-political as well as global market conditions, it is likely that that real-estate may not suffer further drops in 2011.