Dubai's economic recovery hinges on the successful restructuring of the emirate's companies, further financial support from the Federal Government and improvements in transparency, the Institute of International Finance (IIF) said yesterday. Significant reform in these areas would encourage greater flows of foreign direct investment, helping to boost growth in Dubai's economy this year, it said.
"With accelerated reforms, Dubai will send the right signals to foreign investors," Garbis Iradian, the senior economist for IIF in the Middle East and Africa, said yesterday in Dubai. "We should know the outcome of the Dubai World restructuring in the next few weeks, which will help determine whether foreigners will invest here." Six years of strong growth in Dubai's economy came to an abrupt halt last year after the global financial crisis slowed the property market, stalled new projects and dried up the availability of credit.
A proposed restructuring of Dubai World prompted the injection of US$9.5 billion (Dh34.9bn) of cash into the conglomerate, including more than half from the Dubai Financial Support Fund, which was set up with help from the Abu Dhabi Government. "Dubai World has been a wake-up call for policymakers that going into debt and leverage may not be too wise sometimes," said George Abed, the senior counsellor and director of IIF for the Middle East and Africa.
The IIF has offered alternative forecasts for GDP this year and next. Under the IIF's "baseline scenario", Dubai's economy would contract by 0.5 per cent this year, with Abu Dhabi's economy growing by 4.5 per cent. GDP for the UAE would be 2 per cent this year and 3.1 per cent next year. The IIF's "reform scenario" offers a more positive forecast, with Dubai's economy returning to growth, albeit only 0.6 per cent, with Abu Dhabi expanding by 4.8 per cent.
The UAE would grow at a higher level of 2.7 per cent this year, with an expansion of 4.3 per cent next year. The more optimistic forecast would require a significant strengthening of the federation and greater support from Abu Dhabi to resolve Dubai's debt crisis on a market-friendly basis, the IIF said in a report about the GCC's economic prospects. An operational restructuring of Dubai's state-controlled companies would also have to happen to improve their long-term viability, it said.
Finally, greater clarity would be needed by investors about whether the government in future would be prepared to bail out any troubled companies it owned. A turning point in the emirate's property market would be another of the main catalysts to the recovery starting in the second half of the year, said the IIF, which is based in Washington DC. Appropriate measures to support bank lending would prevent a further tightening of credit conditions and support a recovery of demand, it said.
Across the GCC, the IIF said states were returning to solid growth, underpinned by higher oil prices, which it forecast to average $75 a barrel this year. It forecast GDP to expand by 4.4 per cent this year and 4.7 per cent in 2011. Structural reforms, including the rehabilitation of banks' balance sheets, and the restructuring of the non-banking financial sector including mortgage and property finance companies, would enhance the growth prospects of the region over the medium term, it said.
tarnold@thenational.ae
