Major Dubai projects may be phased in amid cheap oil impact
Thursday, 3 December 2015 10:23 AM
Dubai should be able to tackle its refinancing challenges but large projects are expected to be gradually phased over time as cheap oil continues to bite on the UAE economy, according to a new Bank of America Merrill Lynch research report.
The report said the GCC macro story is likely to have peaked if oil prices stay low for long. Twin deficits are expected, as well as weaker real GDP growth and softer non-hydrocarbon sector growth on greater fiscal policy prudence.
A prolonged period of low oil prices and regional geopolitical threats remain the primary risks to local economies, it added.
Jean-Michel Saliba, MENA economist, said: “In our view, the UAE economy is likely to soft land this year, as suggested by only modest deceleration in high-frequency indicators.
“The near-term direct impact of lower oil prices on UAE is more muted than for GCC peers. However, the indirect impact through lower regional and domestic liquidity, real estate, external sector and indebtedness would be more pronounced if oil prices remain low for long. In the near-term, we think Dubai should be able to tackle refinancing challenges.
“Nevertheless, we expect large Dubai projects to be gradually phased over time. We see strong Dubai government commitment to the timely completion of the Expo 2020. Disciplined fiscal policy remains paramount for Dubai government debt dynamics to take a stabilizing sustainable path,” he said.
He added that in Saudi Arabia, wider deficits cushion growth, due to softer non-oil GDP growth, risks on the government capex pipeline, stable politics and unwavering oil policy.
“Economic activity remains cushioned in the near-term due to continued expansionary fiscal stance and still healthy credit growth. Overall on-budget capital expenditures are likely to be curtailed, although strategic projects appear ring-fenced… Despite the increased fiscal strains, we think that Saudi Arabia is unlikely to capitulate on its energy policy,” he said.
The report said Qatar remains the most resilient GCC economy and is expected to continue outperforming GCC peers, as World Cup capex spending appears set to continue.
Qatar’s fiscal and external breakeven oil price remains among the lowest in the GCC, it added.
The report also said GCC equity markets are looking increasingly attractive after the broad based sell off since the summer.
It said markets in the Gulf region presently represent a buying opportunity, particularly with appealing stock valuations and stronger earnings momentum.
“There are broad based buying opportunities, but stock selection is becoming key. We retain our bias for markets with robust macro, attractive valuations, consistent earnings delivery and/or superior earnings growth,” said Hootan Yazhari, head of MENA & Frontier Markets Equity Research.
“These factors make the UAE our most preferred MENA market and Kuwait as our preferred GCC Frontier market. The sharp correction across Frontier markets since the summer has also yielded strong opportunities across many other markets, including Saudi Arabia.
“In this context, we believe stock selection (rather than market selection) is becoming more crucial and advocate a focus on quality and mispriced opportunities,” Yazhari said.
He added that the UAE offers “long term potential and healthy earnings momentum” while in Saudi Arabia, the consumer space presents an “attractive long term opportunity”.