Dubai Economy Expected To Exceed Forecasts

by Lorys Charalambous, Tax-News.com, Cyprus

21 May 2012

Dubai's Economic Council believes that the Emirate will achieve economic growth above the estimates of international institutions, with strong performance anticipated in many of its key sectors in 2012.

Ali Tawfiq Al Sadeq, the Chief Economist at Dubai's Economic Council said: "Our projections show that Dubai's real Gross Domestic Product (GDP) will grow by 4-5% this year. This will be supported by expansion in overall economic activities, and strong performance in key sectors," as evident in figures for the first quarter of 2012. Other agencies have forecast growth of around 2.5% for 2012, lower than the 3% rate achieved in 2011.

According to the government, among Dubai's critical sectors, manufacturing and trade remain key drivers for Dubai growth. Following the bursting of the real estate bubble in Dubai, previous growth drivers such as construction and real estate have declined in significance over the last few years, but the contribution of the financial services industry to economic growth will grow substantially on 2011, supported by authorities' pro-business, low tax policies.

Projections released by the Dubai government in February say the financial services industry will experience comparatively moderate growth in 2012, of just over 4%. Tourism is anticipated to be the best performing sector, with 6.5% growth anticipated, while the transportation, manufacturing and trade sectors are expected to outpace the Dubai economy in general with growth rates of around 6%. With overcapacity in the real estate sector, the construction industry is set to further decline by 2.5% this year, as investor appetite for new real estate projects remains lacklustre.

According to the International Monetary Fund (IMF), high oil prices and increased production, strong growth in Asia, and its perceived safe haven status in the context of the regional turmoil contributed to an estimated real GDP growth of 4.9% for the United Arab Emirates (UAE) in 2011. However, the IMF expects economic growth to slow to just 2.3% in 2012.

Dangers highlighted by the IMF to future growth of the UAE economy include banks' exposure to indebted government-related entities (GREs). While the Dubai World debt restructuring was completed last year, several other troubled GREs are still in the process of restructuring. Refinancing needs and reliance on foreign funding remain high, the Fund noted in its latest assessment of the country's economy, with about USD30bn in GRE debt maturing this year and a significant amount of debt falling due in 2014–15.