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UAE and Qatar:
Challenges and risks
Khatija Haque
SHUAA Capital
May 2010
Drivers for growth in the UAE and Qatar
• Non hydrocarbon growth
– Private sector credit
recovery
– Investor and business
confidence
– Government spending until
private sector recovers
– Structural reforms
• Hydrocarbon growth
– Global growth risks
Real growth (% YoY)
30
Qatar
25
Dubai
Abu Dhabi
20
15
10
5
0
-5
-10
2007
2008
2009
2010f
Source: National sources, SHUAA Capital Research
2
Private sector credit growth is key
• Credit to private sector in Qatar
didn’t slow as much as in the
UAE, and seems to be recovering
well
– Lending practices had been
more conservative
– Govt took over real estate
portfolios and pumped
liquidity into the system
• But UAE and KSA also took
measures to boost liquidity
– Bigger exposure to corporate
and quasi-sovereign debt
problems? Or just plain risk
aversion?
Claims on the private sector (% YoY)
50
UAE
Qatar
KSA
40
30
20
10
0
-10
Source: National sources, Haver, SHUAA Capital
Research
3
So what did banks do with the additional liquidity?
45
40
35
Banks' cash and deposits (USDbn)
UAE
-25.0
UAE banks' net foreign assets (USDbn)
-20.0
Qatar
30
-15.0
25
20
-10.0
15
10
-5.0
5
Jan-09
0
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
0.0
• Increased cash balances and deposits at central bank
• UAE banks paid down foreign liabilities and increased foreign assets
Source: National sources, SHUAA Capital Research
4
Government crowding-out of private sector?
• UAE government borrowing
increased at the expense of the
private sector
• Banks appear to have been risk
averse:
– Saad/ Al Ghosaibi and DW;
uncertainty about impact on
balance sheets and
provisioning
– Difficult to distinguish
between low-risk and highrisk borrowers; name lending
no longer an option
60 % YoY
Claims on public sector
Claims on private sector
50
40
30
20
10
0
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Source: National sources, Haver, SHUAA Capital
Research
5
Outlook for credit growth is improving
• Resolution of uncertainty around DW restructuring
• Banks need to grow loan books to generate earnings
• Improvement in overall liquidity as petrodollars flow in and bank
deposits grow
• Introduction of new credit bureaus should facilitate better risk profiling
• Structural / process reforms will take time
6
Investor and business confidence affected by global
events
bps
Jan 2009 = 100
160
CDS spreads
1000
900
Abu Dhabi
800
Dubai
700
Qatar
600
Greece
Equity market indices
140
120
100
500
80
400
60
300
40
200
20
100
0
Jul-09
Sep-09
Nov-09
Jan-10
Source: Bloomberg, SHUAA Capital Research
Mar-10
May-10
TASI
Abu Dhabi SM
0
Jan-09 Mar-09 May-09
Jul-09
Sep-09
Doha SM
Dubai FM
Nov-09
Jan-10 Mar-10 May-10
Source: Reuters, SHUAA Capital Research
• Dubai: highest perceived risk of default in the region
– size of debt and concerns about payment capacity
– most affected by global capital market developments
• Qatar and Abu Dhabi are less vulnerable because of their accumulated
oil/ gas revenues and expected future export earnings
7
A few factors affecting investor confidence
• External risks:
– Potential slowdown in global growth/ double-dip recession and implications
for oil prices and output
– Another bout of heightened global risk aversion
• Lack of transparency about the financial positions of GREs and govt
owned companies
•
– nagging fears of another debt shock or high-profile corporate default in the
region
– Greater openness and financial transparency could reduce the risk
premium and cost of borrowing for GREs and other corporates
Resolution of the DW restructuring
– Much uncertainty in terms of the impact on banks’ balance sheets has been
removed
– Cash payout to Nakheel’s trade creditors should provide some much
needed liquidity
8
The debt story does have a silver lining
• Dubai’s borrowing spree has been used – for the most part – to fund
much needed infrastructure
– Helped to diversify the UAE’s economy away from oil
– Will support long-term growth and benefits the whole country, not
just the emirate
– Dubai has, perhaps unfairly, shouldered the burden for financing this
infrastructure investment that in most countries is a federal/ central
government function
• Qatar has also borrowed heavily from external markets to fund
investment in upstream and downstream industries
– We estimate external debt to GDP is about 70% (2009), up from
30% in 2006
– The funds have been used for projects that will generate export
earnings over the long-term
9
Government fiscal support still needed
• UAE: fiscal stimulus needed to offset weak private sector activity
– Abu Dhabi has substantial resources that it can draw on to support
growth
– No budget projections or data available
– Anecdotal evidence suggests major infrastructure projects are still in
early stages ie little real economic stimulus likely in 2010
– Risks to our 2010 growth forecast of 2.5% are on the downside
• Qatar: investment in LNG infrastructure has been a key contributor to
growth in recent years
– Development expenditure budgeted to remain high in FY2010/11
– Investment projects to be prioritized and carefully managed to
prevent build-up of inflationary pressure
10
Structural reforms - UAE
• Authorities have recognized the need for both macro- and micro –
economic reforms that would support growth over the medium term.
– Some examples:
•
•
•
•
•
•
Greater labor mobility, reducing red tape to encourage private sector investment
Establishment of a central debt management office at the federal level
Creation of national credit bureaus that share creditor information between banks
The need for an insolvency framework
Strengthening the legal framework within which businesses operate
Restructuring and streamlining of government-owned entities
– How quickly will these changes be implemented?
• Improvement in the quality and availability of data
• No 2009 GDP data (yet), no regular leading indicators of economic activity, no budget data or
official forecasts
• Are the Free Zones fully accounted for in national GDP statistics? Unlikely.
• Accurate, regular data is necessary both for financial analysts (more efficient pricing of
assets) and policy makers (better investment and policy decisions)
11
Structural reforms - Qatar
• Also needs to formalize and centralize management and issuance of
external debt by quasi-sovereigns and the state
• Data availability and quality can be improved – more regular updates
and more detail, introduction of regular leading indicators would be
useful
• Prudential regulation and risk management at banks could be improved
to avoid the need for future bail-outs
• Microeconomic reforms to improve the operating environment for private
sector enterprises and encourage inward investment into the non-oil
sector.
12
Hydrocarbons: Still the biggest contributor to growth
• Qatar’s economy is the least diversified in the GCC – more than 50% of
nominal GDP is from oil and gas
– Gas sector expansion to continue to underpin growth in 2010 and
2011; LNG output expected to peak next year
– Relatively less exposed to global economic cycle as contracts are
long term (20-25yrs) and most have floor prices for LNG
• UAE’s oil sector accounts for about one-third of total output
– Output likely declined in 2009 as a consequence of lower oil prices
and global recession; expected to recover this year
– Vulnerable to double-dip global recession
– Fiscal stimulus and support of non-oil growth becomes even more
important
13

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