Dubai economy picks up with tourist activity on the rise

Dubai's economy picked up in November as tourist activity increased against the previous month, an economic survey of the emirate shows.

The Dubai economy tracker, a survey of business conditions in the emirate, rose to 53.4 in November, up from 51.9 in October. Any score above 50 indicates economic expansion.

That was the result of increased activity in tourism, retail and construction, the survey indicated. Peak season for Dubai is the cooler, winter months.

Absolute occupancy in October was above historic trends for the month, according to travel forecaster STR Global. The Dubai economy tracker showed activity in the tourist sector growing to 52.2 last month, up from 49.9 in October.

"Activity in the travel and tourism sector has improved as we head into the ‘high season' for hospitality,” said Khatija Haque, the head of Mena research at Emirates NBD.

But economists expect Dubai's economy to slow following the second decline in the oil price this month and a probable interest rate rise this month from the US Federal Reserve.

"It's coming from all directions,” said Monica Malik, the chief economist at Abu Dhabi Commercial Bank. "With the strong dollar, the low oil price and falling Dubai housing prices, it's a challenging environment.”

Oil fell to $37.93 per barrel on Friday, its lowest level for seven years, in a move that will cause further pain for Gulf economies that are tied closely to the oil price. The price move followed an Opec meeting at which the group suspended production quotas, leading oil markets to predict further declines in prices as new Iranian production adds to total output.

"This second move downwards in oil prices is impacting sentiment. 2016 will be a critical year – we will need to see where the market finds equilibrium, with Iranian oil production set to increase. Uncertainty in the oil market is impacting sentiment in the GCC and will filter into Dubai,” Ms Malik said.

That trend is also expected to hurt the construction industry as investment projects are postponed. "The outlook for construction will continue to remain challenging as both government and private investors remain cautious,” she said.

Higher interest rates will push up the dollar and dirham against world currencies. That will make Dubai property even more expensive for foreign buyers, hurt tourism in the Emirates and will raise the cost of bank credit. The dollar has appreciated by about 20 per cent since July last year.

But, with a gradual pace of interest rate hikes expected, and expectations of a higher dollar already priced in, Ms Malik thinks that the dirham won't appreciate much further.

"What will be critical after the Fed meeting is the outlook for the rate-hiking cycle. With a gradual rate-hiking cycle expected, and already priced in by markets, the potential upside of the dollar is limited,” she said.

With larger reserves and a smaller fiscal deficit, the UAE is better placed than its Gulf neighbours to tolerate a prolonged period of low oil prices, said Alp Eke, chief economist at the National Bank of Abu Dhabi. "Declining [oil] prices have slowly started to deplete net foreign assets and created pressure on the budget, but the UAE seems to be weathering the storm much better than other oil-exporting nations.”
Source: The National