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27 March 2011
Dubai’s economy may benefit as international visitors choose the safe-haven emirate over other troubled regional tourist destinations, notes Citibank. But Egypt and Bahrain will suffer from poor growth.

The UAE may benefit from the unrest in other parts of the Middle East, according to Citibank, with Dubai set to grow 5% this year and at an even faster clip at 6% in 2012.

“Due to its relative political stability, we believe there is a possibility of a diversion of commercial, investor and tourist activity from less stable parts of the region. The external sector thus is the main driver of the recovery, with gains being posted both in export growth, and a reduction in imports,” notes Citibank.

“Dubai’s economy, in particular, is showing signs of strong externalled recovery as sectors such as tourism, trade, logistics and transportation respond strongly to the rebound in the global economy and may get a boost from the political instability in regional competitors.”

Tourism body IATA’s data shows air traffic to both Egypt and Tunisia fell by 100,000 since the unrest decimated both countries’ tourism industries in January. This translates to a fall of 6.2% in available seat kilometres _ a barometer for airline capacity which measures seats on sale adjusted for the distance flown, says Reuters, adding that airlines removed 776 or 32% of flights to or from Cairo during January to March.

Meanwhile, UAE air traffic grew by 7.6% in February.

However, it is Bahrain that is concerning Citibank economists: “We now believe events in Bahrain are likely to have an impact on near term economic growth, and have lowered our forecast for 2011 to just 1%.”

The U.S. bank expects the tiny Kingdom’s growth to return in 2012 as the $10-billion bailout fund from other GCC states trickles into the economy and planned housing works and other projects are accelerated. “Long-term, however, the violent unrest may take its toll on Bahrain’s ambitions of fostering a regional financial centre.”

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Citibank does not expect the unrest in Saudi Arabia to escalate or impact on oil production in the country.

“The economic impact on Saudi Arabia from the crisis thus far has been benign, in our view. With our view that oil prices are now likely to average US$105 in 2011, we have sharply revised upwards our fiscal surplus expectations to 8.5% of GDP. This takes into account an anticipated rise in current expenditure of over 50%, reflecting the measures taken by King Abdullah in the past few weeks. The rise in the government balance also reflects a 10% rise in oil production as Saudi Arabia pumps more crude to compensate for the loss of Libyan production.

“This 10% rise in oil output raises our GDP growth expectations for 2011 to 7.5%, up around 3% from our previous estimate, reflecting the share of oil productions in GDP.

“While comfortably accommodated in the near term, the rise in expenditure raises the fiscal breakeven oil price for Saudi Arabia to over US$80 per barrel, potentially leaving public finances exposed to any future fall in the oil price,” the Citibank notes.

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Further west, Egypt’s economy will fall off a cliff from 5.1% in 2010 to 1.4% in 2011, as the authorities in that country come to terms with the monumental upheavals which led to the ouster of its long-serving President Hosni Mubarak.

“The current government should just about be able to ride out the economic dislocation caused by the political unrest in 2011, even if it faces financing issues. But in order to restore growth and confidence in the economy, a new government will have to quickly formulate a more coherent policy for 2012.”

Clearly, analysts are waiting to see how the governments handle the promising North African economy.  Citibank warns that a populist economic policy may prove to be unpromising, but a reformist government could devalue the Egyptian pound to boost growth.

“But the key aim of protestors, the need to create jobs and reduce inflation, will remain a tricky policy goal for any new government in our view, especially one with only limited political experience and a weak fiscal inheritance.”

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