HSBC expects the UAE economy to continue to grow despite oil prices running 50 per cent below their cyclical peak and the positive growth momentum will be reflected in the bank’s performance in the country.
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“Our HSBC house view on the UAE is that we remain broadly comfortable with the economic outlook and continue to look for it to deliver the best performance of the Middle East’s oil producing states,” said Abdul Fattah Sharaf, UAE CEO of HSBC.
The scale of the wealth the UAE commands and the greater diversity of its economic base has softened the impact of energy prices on performance. Having invested heavily in its non-oil base, particularly its export-oriented service sector, HSBC expects the UAE to generate current account surpluses.
“With their fixed currency pegs and strong balances, the Gulf states’ adjustment to the terms of trade loss is only at an early stage. Of the two largest Middle East oil producers, the UAE looks set to outperform. In part, this outlook reflects its more diversified economic base, which combines the hydrocarbon wealth of Abu Dhabi with the export-oriented service base of Dubai,” he said.
Although the budget is expected to remain in deficit, the projected budget shortfall is modest when compared to those facing other GCC states, and as a consequence the bank expects the fiscal adjustment to be less severe and less long-lasting.
Growth across units
While 2015 was a tough year for the bank in the region; particularly the UAE, Sharaf expects a turnaround this year. “From a regional perspective, in the first nine months of the year our profit before tax has increased by 6 per cent. I’m pleased to say that we’re seeing growth across our retail, commercial and investment banking businesses,” he said.
Recent policy announcements in the UAE suggest that the end of the oil boom has sharpened appetite for structural reforms. The emirate-level governments have announced plans for mergers and consolidation in the public sector in an apparent bid to boost efficiency and economies of scale. To encourage risk-taking and investment by the private sector, the UAE is also set to enact its first corporate bankruptcy law.
While there has been a slowdown in new project announcements, big strategic infrastructure projects like Al Maktoum International Airport, which HSBC is helping the government finance, are still going ahead.
The bank expects further pick up in government spending in both Dubai and Abu Dhabi. Going forward the economic activity will be driven by factors such as the strengthening regulatory environment; growing market transparency; recovery in oil prices; and increased construction activity in the run up to Expo 2020.
“We expect the UAE to be the region’s outperformer, but there are clear signs that the economy is slowing and we expect the softness in activity to persist over our extended forecast period,” he said.
Despite the difficult economic environment, the UAE’s hard work has enhanced its attractiveness as a place to do business according to HSBC. The country has jumped from 34 to 26 in the World Bank’s latest Doing Business Report 2017. The major improvement took place in the field of protection of minority investors, with the UAE’s ranking in this regard jumping from 48th in 2016 to 9th, as a result of the new corporate governance rules published by the Exchange Securities and Commodities Authorities (ESCA) which came into force in May. This should give international investors greater comfort.
However, the dollar-driven appreciation of the UAE dirham in real effective exchange rate terms will weigh on competitiveness, compromising efforts to attract capital and tourists from Europe and the UK. Slow global trade is also likely to stiffen the headwinds facing the UAE’s ports and airports and broader re-export sector.
The bank expects growth to run at just a little over 2 per cent a year over our forecast period (for both 2016 and 2017), with little sign of acceleration.
“Given recent supply-side expansion, this demand dynamic should ensure that inflation remains low, despite subsidy cuts. We strongly expect the dollar-peg to remain in place, and look for the UAE to gradually raise its policy rate, in line with the Fed, said Sharaf.
Factbox: HSBC’s history in the UAE
To mark its 70 years of successful journey HSBC recently launched a book on its history in the UAE. It captures the bank’s key milestones and anecdotes in the UAE, reflecting the ambitions and challenges of the people who helped establish HSBC in the UAE.
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