The risk profile some investors assign to Dubai unjustified as the country's economy remains strong, says Merrill Lynch.
Risks reflected in Dubai markets overblown
Economists and analysts have raised concerns in recent weeks that Dubai's red-hot property market could enter a lull, while a dip in oil prices and the global credit crunch are becoming a drag on the recent rapid profit growth of the country's banks. Those concerns have merged with the withdrawal foreign investors have staged recently from emerging markets to pull the Dubai Financial Market down more than 20 per cent, making it the second-worst performing market in the GCC behind the Tadawul exchange of Saudi Arabia.
Property companies such as Emaar, with its shares falling more than four per cent yesterday, and banks have led the declines.
Meanwhile, the amount that international markets charge to insure against the default of the debt owed by local companies and government entities has risen sharply, a sign that global investors see more risk. In some cases that insurance, which comes in the form of a financial transaction known as a credit default swap, has implied that Dubai debt is even riskier than countries such as the Baltic states or the Balkans, which unlike Dubai are massively indebted compared to the size of their economies and run large current account deficits, according to the Merrill report.
Those levels of concern were not warranted, Merrill concluded, but it added the economy may well slow, and as much as one-third of the projects in the pipeline could be delayed or curtailed in a worst-case scenario. "As global growth has dipped and funding has become scarce, US$320 billion (Dh1.17 trillion) worth of planned construction projects are likely to be shaved off," the report said.
Industries such as tourism could be battered by a global economic slowdown, but the country's economy would still grow twice as fast as the world average, Merrill predicted. And with inflation running in the low double digits, a slower growth rate could actually benefit the economy. In addition, Dubai is not likely to face any possible funding crisis alone. Abu Dhabi, which has almost no debt and sits on nearly eight per cent of the world's oil reserves, would quite likely lend a hand in a true financial crisis, the Merrill report said.