ROSE COLORED GLASSES??? THE UAE 2009 ECONOMIC OUTLOOK

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 000011

SIPDIS

DEPARTMENT FOR NEA/FO, NEA/RA (SCOVITCH) NEA/ARP (BMASILKO) AND EEB
STATE PLEASE PASS USTR (BUNTIN)

E.O. 12958: DECL: 01/03/2019
TAGS: ECON EFIN EINV ENRG PREL PGOV AE
SUBJECT: ROSE COLORED GLASSES??? THE UAE 2009 ECONOMIC OUTLOOK

ABU DHABI 00000011 001.2 OF 002


Classified by Ambassador Richard Olson for reasons 1.4 (b,d).


1. (U) This is a joint Embassy Abu Dhabi - Consulate General Dubai
cable.


2. (C) Summary. What was initially widespread denial that the global
downturn would impact the UAE's development plans has now
transitioned into open expressions of concern about economic
prospects for 2009. Government contacts still argue that the UAE
will manage positive GDP growth and that, in the medium-term, the
slowdown will be beneficial. However, some private sector contacts
are deeply concerned, in part because government efforts have not
been sufficiently transparent to allay their fears. While impact on
the UAE in 2009 is far from clear, the unique structure of the
economy may bring a much-needed respite in inflation along with a
calming correction to the high profile project craze of 2004-2008.
End Summary.

BOOM YEAR ENDS ON A SOUR NOTE
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3. (C) UAE economic news in the closing weeks of 2008 did little to
inspire confidence about the new year. Local stock indexes fell to
2004 levels, major firms like Dubai's Nakheel delayed projects and
fired some employees, ratings agencies downgraded outlooks for
parastatal firms and local banks (including Dubai Electricity and
Water Authority (DEWA) and Abu Dhabi Commercial Bank (ADCB)),oil
prices fell dramatically, and Abu Dhabi Investment Authority (ADIA)
was reported to have been a (minor) victim of the Bernie Madoff
investment fraud. Without doubt, ADIA, like all holders of
diversified equity portfolios, has seen a significant decline in the
value of its holdings. Interbank lending rates continue to exceed
four percent, despite government liquidity facilities. All in all,
there was little to celebrate in the holiday season, apart from an
extended public sector vacation in December and competing "world
record" fireworks displays in Abu Dhabi and Dubai.

POSITIVE GOVERNMENT SPIN...
--------------


4. (C) Despite these negative developments, government officials
continue to project optimism about 2009. In Abu Dhabi, senior
officials argue that cheap oil production, ADIA's careful investments
and economic diversification will all help ensure 2009 brings
necessary consolidation and a welcome breather from what some
perceived as overly rapid growth. Federal and local budget
expenditures will increase almost 20 percent, providing fiscal
stimulus and helping ensure the largest private sector entities will
survive. Officials argue that consolidation in many sectors (e.g.,
real estate, construction and finance) will create leaner and
stronger firms. Prime Minister and Ruler of Dubai Sheikh Mohammed
bin Rashid Al Maktoum echoed this optimistic line to CODEL Dorgan in
mid-December, while complaining about the widespread rumors of
Dubai's imminent demise.

...DOESN'T ALLAY PUBLIC CONCERN
--------------


5. (C) Despite the positive official spin, the lack of transparency
about how exactly the government is addressing the crisis has led
many private sector contacts to fear a painful adjustment in 2009.
Announced and expected consolidations mean many firms, including
quasi-public entities, will scale back planned expansions and/or be
forced to cancel announced projects. The resulting job losses and
broader impact on economic growth are of great concern to Emiratis
and resident expatriates (who have become quite accustomed to
ever-expanding economic opportunity in recent years). In particular,
falling oil prices, speculation about ADIA's losses, uncertainty
about Dubai's debt burden, and continued stock market instability
have significantly dampened the exuberance of a few months ago.

2009 GROWTH LIKELY TO SLOW,
BUT NOT DIP TO RECESSION
--------------


6. (C) Predictions for 2009 vary. While many expect the global
economy will recover from its current downturn in the first or second
quarter, contacts fear the UAE could witness a longer downturn in

2009. As indications of a slowdown did not appear until fall 2008,
some fear the UAE may not recover until 2010. However, government
officials and private analysts all predict 2009 real GDP growth will
be positive, if only between two and three percent.


7. (C) The unusual structure of the UAE economy (and others in the
region) helps to minimize the impact of an economic slowdown.
Unemployment is largely irrelevant to Emirati nationals, as their
jobs are usually protected and expatriate workers simply depart (or
are expelled from) the UAE if they lose their jobs. Nationals and

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expatriates who keep their jobs are in fact likely to see an increase
in standards of living. As global commodity prices fall, and real
estate becomes cheaper, inflation is expected to decline (from an
average of almost 10 percent in recent years). A rising U.S. dollar
(relative to 2008 lows) means that food and other consumer imports
will become cheaper, while worker remittances also increase in value.
Major contractors report that costs, including labor and
construction materials, are already falling as demand declines.


8. (C) Comment. The economic slowdown calls into question the
fundamental strength of the UAE's "if you build it, they will come"
development model. 2009 will reveal if Dubai's enormous ambitions
were built on leverage that is no longer possible to secure in
today's global economy - or on actual demand for a regional
commercial center, financial services, tourism, etc. Dubai is still
an island of liberal economies, social tolerance and freehold
property rights in a region of over a billion people and burgeoning
middle classes. While Abu Dhabi's overall financial strength will
guarantee its continued economic development, officials may choose to
downsize its ambitions to reflect the new reality of the global
financial system. End Comment.
OLSON