x Abu Dhabi, UAESunday 21 January 2018

Rapid Dubai growth and ‘expo-euphoria’ lead to bubble concerns

Caution raised by economists after the property market rose nearly 12% in six months, the Dubai stock market was the second-best performing in the world and winning Expo 2020 added "extra zest".

Growth in Dubai this year is expected to be driven by segments outside of the oil sector. Satish Kumar / The National
Growth in Dubai this year is expected to be driven by segments outside of the oil sector. Satish Kumar / The National

Forecasts for another year of rapid growth in Dubai have triggered fresh warnings about the risk of a bubble.

Two separate reports have sounded caution after a sharp pickup across the emirate’s economy last year. Prices in the property market rose by nearly 12 per cent in the past six months, while Dubai’s stock market index was the world’s second-best performer in 2013 with a gain of 107.6 per cent.

“Winning the bid for Expo 2020 adds extra zest,” Sachin Mohindra, the portfolio manager of the GCC fund at Invest AD, an Abu Dhabi-based asset manager, wrote in a report released yesterday.

“The only concern is that another bubble may be forming, particularly in real estate, but at least now everyone is talking about this as a concern.”

Growth this year would be driven by segments of the economy outside the oil sector, wrote Mr Mohindra, with particular emphasis on trade, logistics, tourism and retail.

The IMF has forecast the UAE’s growth this year to reach 3.9 per cent, compared to 4 per cent last year.

Last June, stocks received a boost when the market index provider MSCI upgraded the country to emerging-market from frontier market status .

Then, in November, Dubai won the bidding to host the World Expo 2020, an event expected to trigger higher spending by companies and tourists in coming years.

In a separate report released last week, brighter prospects for the global outlook this year prompted Roubini Global Economics to upgrade its growth forecast for the UAE, wrote Maya Senussi and Rachel Ziemba, economists at the research company. The Expo win would reinforce the property market’s share of growth, they added.

But the MSCI upgrade risked drawing more money into the property sector, they wrote.

The risk could be a “boom-and-bust” cycle in the coming years, they warned.

“With the UAE’s dollar peg, there is a potential for bubbles to develop in Dubai, possibly reinforced by Expo-euphoria, with the authorities relying on macroprudential measures to cool frothy asset markets that the Central Bank may not have authority to reinforce,” they wrote.

In an effort to minimise the risk of a repeat of the property bubble that formed in the run-up to the global financial crisis in 2008-2009, the Central Bank came out with mortgage lending caps and plans to tighten bank borrowing by government-linked companies.

Policymakers are anxious to avoid a repeat of 2007 when a flood of speculative money stoked inflation and a housing bubble as investors brought in funds on the expectation that the dirham would be revalued.

The revaluation did not happen and the financial crisis sparked a sudden outflow of money, exacerbating the UAE’s credit crunch.