UAE and Qatar: Challenges and risks

1. UAE and Qatar:Challenges and risks Khatija Haque SHUAA Capital May 2010

2. 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 Source: National sources, SHUAA Capital Research

3. 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? Source: National sources, Haver, SHUAA Capital Research

4. So what did banks do with the additional liquidity? • Increased cash balances and deposits at central bank • UAE banks paid down foreign liabilities and increased foreign assets Source: National sources, SHUAA Capital Research

5. 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 high-risk borrowers; name lending no longer an option Source: National sources, Haver, SHUAA Capital Research

6. 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

7. Investor and business confidence affected by global events • 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 Source: Bloomberg, SHUAA Capital Research Source: Reuters, SHUAA Capital Research

8. 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

9. 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

10. 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

11. 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)

12. 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.

13. 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