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 didnt 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 ResearchSource: 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 Nakheels trade creditors should provide some much needed liquidity

9 The debt story does have a silver lining Dubais borrowing spree has been used – for the most part – to fund much needed infrastructure –Helped to diversify the UAEs 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 Qatars 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 UAEs 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