UAE ECONOMY

There is no escaping the fact that UAE has endured a difficult start to 2009. Though the financial crisis and the global economic slowdown will obviously affect the United Arab Emirates, with some capital withdrawal already apparent and mounting concern about bank exposure to real estate assets, any fallout should be modest in the short-run. The economy remains well shielded from a sharp downturn by its large current account surplus, estimated at over $285bn (27.9% of GDP) in 2008 from $136bn (18.6% of GDP) in 2007, on top of the government’s large controlled overseas assets. In terms of growth prospects, real GDP growth is now seen at about 7.2% in 2008 (median average of the main international agencies) and, amid mounting uncertainties about the global economic outlook and investment flows, the median average 2009 real GDP forecast is set to fall to 2.0%. One key prospect to emerge from the slowdown will be the reduced inflationary pressures resulting from the fall in soft and hard commodity prices. Rapidly rising food prices, rents and crude oil prices lifted inflation in the United Arab Emirates to 11.1% on average in 2008, but with the sharp fall in commodity prices witnessed since last summer, international agencies expect a moderation to around 8.9% in 2009. The UAE's banking sector has been hit hard by the financial downturn, with a series of profit falls being announced in 2009. Indeed, liquidity and the real estate sector are the major concerns, while the non-Abu Dhabi based banks now look relatively under-capitalised and potentially more vulnerable to any future deterioration in the economy. Looking ahead, there is light at the end of the tunnel. The United Arab Emirates growth outlook has indeed come under downward pressure as a result of the marked deterioration in the global economic environment (which has led to a collapse in crude oil prices) though the fundamentals which support growth in the United Arab Emirates remain robust. The United Arab Emirates, and indeed the GCC as a whole are in a strong position to withstand the global economic turmoil even though all components of GDP are expected to weaken in 2009. As mentioned, international agencies suggest that real GDP growth will moderate to 2.0% in 2009 from an expected 7.4% in 2008. Several years of strong fiscal and current account surpluses have resulted in a large build-up of net foreign assets, increasing the ability of the government to support the wider economy and this will help the government ride out any weakness in economic growth this year. UAE Real GDP growth, % Average

BUT REAL ESTATE IS LOOKING UP As a direct consequence of the international economic and financial market pressures, Dubai has experienced an abnormally large correction in its real estate sector, with average prices falling some 40 to 60%, taking the current benchmarks back to 2006 to 2007 levels. Whilst this may seem alarming to outsiders, those that are and have been active within this local market during 2007 and 2008 will ascribe to the fact that trading levels were unrealistically inflated though an abnormally large number of speculators all taking a 'short position' in the market and driving short term prices on a 'commodity based' trading logic - something that clearly does not carry sustainability beyond the medium term. Investment management

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