Dubai’s purchasing managers index (PMI) – a key indicator and barometer of the health of the economy – witnessed its first improvement in business conditions in July, and its highest reading since December 2019, a new report said.

The recovery is due to a robust rise in output and new work, supported in part by wide-ranging price discounting, said the Mitsubishi UFJ Financial Group (MUFG), a Japanese bank holding and financial services company, in its latest Mena Economic Weekly report.

High frequency indicators signal that Dubai’s economic recovery is well past the April nadir, with the pace steadily picking up.

Whilst the timeliness and availability of official data is scarce in Dubai, unconventional high frequency indicators offer an excellent perspective in how the economy is navigating the coronacrisis. Adjusting for biases and seasonality in Apple and Google daily real time mobility indicators as well as traffic congestion indices, are signalling some normalisation in activity back to baseline pre-coronacrisis levels.

Moreover, in a sign of improving risk appetite, Dubai’s 5-year CDS spreads has fallen by ~200bps from the peak reached in mid-March to currently hover ~160bps – still ~30bps above the 2019 average, but nevertheless a clear signal of easing investor credit fears.

Despite improving metrics, Dubai is not out of the woods

Dubai has been most vulnerable to the coronacrisis than other regional economies, with more than a third of the economy – wholesale and retail trade, transportation, recreation and hospitality – explicitly susceptible to physical distancing and travel restrictions.

Market apprehensions over the large debt burden of Dubai’s government related entities (GREs) debt have also reignited, which remain most exposed to macro risks due their holdings in the real estate, wholesale and retail trade, transportation and hospitality sectors.

From a growth perspective, Dubai had been easing even prior to the coronacrisis

1.     Cyclically, passenger traffic at Dubai’s airports contracted in 2019 for the first time in two decades. Also, the slowdown in international trade due to US-China trade tensions had a knock-on effect on throughout at Jebel Ali volumes – region’s largest port and tenth biggest in the world – which shrunk on an annualised basis last year.

Elsewhere, the rise in regional domestic entertainment and leisure sectors had already exhibited rising competition to Dubai’s tourism industry before the pandemic even begun. Accentuating the corporate strains, the Dubai Chamber survey of 1,228 CEOs in April found that 43% said there was a high risk they would go out of business in the next six months.

2.     Structurally, the problem of overcapacity in Dubai’s economy across key sectors has been a pressing issue. The realty sector has faced challenges for some years, with concerns building that the downturn is deteriorating. Real estate prices and rents (for both apartments and villas) are now at least 30% below their late-2014 peaks, predominantly reflecting a large magnitude of supply coming on stream which has caused a mismatch with slower demand growth.

Data from Refinitiv illustrates that there are a large number of commercial, retail and hospitality projects in Dubai due to be completed over the rest of this year – many of these were projects signed off prior to the coronacrisis and it would appear that some developers have decided to push ahead with completion.

Encouragingly, prudent measures taken in recent years in the real estate space, such as the tightening of industry self-regulation, higher real estate fees, and pragmatic macroprudential regulation for mortgage lending have all helped contain speculative demand, signalling that the real estate sector is facing an ongoing correction, lending itself to more stable and affordable market rather than a slowdown in realty, per se.

The unparalleled wealth of the Federal government is guarding against the crisis, with Dubai uniquely positioned given its well-diversified base – serving as the regional trading gateway and financial hub – to rapidly recover as the world learns to live and embrace the virus.

Dubai’s economic growth likely to contract sharply in 2020

Dubai’s economy contracted by 3.5% y/y in Q1 2020 due to the start of the coronacrisis. Granted, Q1 2020 figures are old news and only covered the first month of the crisis (in March), with strategic sectors of wholesale and retail trade, transport and storage shrinking. As with economies across the world, Q2 2020 will mark the trough of the contraction, given the economy was shut-down for much of April and only partially reopened in May.

“We expect Q3 2020 to be the quarter of economic stabilisation and gradual recovery, especially given the reopening of borders on 7 July for international tourism. Meanwhile, Q4 2020 should witness the recovery pickup further with strengthening optimism surrounding Covid-19 vaccine probabilities,” MUFG said in the report.

“On net, we see Dubai’s economy contracting -5.2% in 2020, though next year’s recovery will be robust at 4.3% as external demand recovers and the delayed Dubai Expo attracts a likely large influx of tourism inflows. Our forecasts for Dubai are above consensus though we are cognisant of downside risks, particularly if the recent firming in oil prices reverses, job losses accelerate the outflow of expatriates and/or there is a rise in insolvencies,” it added.

The next chapter in Dubai – the “digital economy”.

The ongoing easing in draconian lockdown measures, promising high frequency indicators and renewed investor optimism all signals that Dubai is over the worst. This is breathing new life into the health of the economy. “Granted, risks and challenges abound, but Dubai has passed the nadir in economic contraction and the Emirate is steadily looking to life post-Covid-19 towards a path of a new normal but there currently remain more questions than answers,” the report said.

The conversation is beginning about what the next normal could entail and how sharply its contours will diverge from those that previously shaped the Emirate. In this regard, we take comfort in the government’s recent announcement that at the centre of Dubai’s next chapter will be the “digital economy”, with substantial investment allocation for technological infrastructure, smart cities and multifaceted types of electronic internet of things (IoT) being front and centre of attention.

Dubai has a renowned track record for staying ahead of the curve and recognised the importance of smart governance through the implementation of digital initiatives across sectors even before the coronacrisis began.

“Granted, the expected acceleration of digitisation in Dubai is no panacea to the existing recessionary environment, and by no means is technology, in itself, a principal objective (it merely plays the role of an enabler). However, Dubai’s digital future is promising and the prize is significant,” the MUFG report said. – TradeArabia News Service