ANALYSIS: Prudent Abu Dhabi adjusts strategy
Abu Dhabi, November 9, 2011
When Abu Dhabi announced that it would delay establishing local branches of the Louvre and Guggenheim museums, it was an important signal of the emirate's economic strategy as well as its priorities.
"Due to the immense magnitude of the work associated with the development of such consequential projects, the company has decided to extend the delivery dates," the government-owned Tourism Development and Investment Co said last month.
The company gave no new dates for opening the museums, which were originally scheduled to start operating between 2013 and 2014 as part of a $27 billion art and culture development on Abu Dhabi's Saadiyat Island.
But the message was clear: getting the projects right and ensuring public demand for them would be given precedence over rushing them out quickly to gain prestige.
Across the emirate, which accounts for more than half of the UAE's economy, government-backed real estate, commercial and tourism projects, many conceived during the boom years of 2003-2008, are under review and in some cases being delayed or put on hold.
This is happening under economic pressure; large parts of the real estate market are weak, and the shaky state of the global economy threatens demand for Abu Dhabi's property and tourism sectors. Average residential property prices in the emirate sank 7 percent in the third quarter of this year from the previous quarter, and are down 49 percent from their peak in 2008, according to consultants Jones Lang LaSalle.
But Abu Dhabi's retrenchment is different from the panicky restructuring which was forced on neighbouring emirate Dubai by a property crash and recession in 2009.
Abu Dhabi will not need a bailout and has plenty of money to continue promoting projects; it is merely shifting its priorities away from some high-end developments for which demand has weakened and towards housing and welfare projects for the mass of its citizens.
Abu Dhabi originally wanted to do too much, too soon and has now realised that strategy is not feasible, said Abdelkhaleq Abdullah, professor of political science at Emirates University. "A review of what is going on is very positive -- it is timely and it is a matter of being more prudent. Slow is good, slow is beautiful."
Gauging the extent of Abu Dhabi's retrenchment is difficult because the government is secretive about some aspects of economic policy and does not regularly release detailed data on its spending. But on the level of individual companies, a pattern is emerging.
Abu Dhabi's government-owned investment fund, Mubadala, is reviewing its multi-billion dollar Mina Zayed Watefront project, whose centerpiece was to be the MGM Grand Abu Dhabi, comprising hotels and an entertainment complex. Mubadala first announced the project in 2007, and in 2008 formed a joint venture with MGM Mirage Hospitality to develop it.
"The project is still being reviewed and any material developments will be announced in due course," Mubadala said in an email to Reuters.
Late last year, Mubadala put on hold planned construction of a stadium in Abu Dhabi with capacity for some 50,000 people, citing "proprietary decisions of the government".
Indebted developer Aldar Properties announced in late October that it was cutting nearly a quarter of its staff and scaling back some of its operations. The builder of the Yas Marina Formula One circuit received a $5.2 billion rescue package from the Abu Dhabi government earlier this year.
A report from Citibank, citing data from the Middle East Economic Digest, estimated Abu Dhabi had put on hold some $75 billion worth of projects since April 2010, of which 91 percent are in the real estate and construction sectors.
Government officials insist the decisions made by Mubadala, Tourism Development and Investment Co and other companies are independent ones made on a case-by-case basis by the firms.
"These are positive decisions and are being made on their own merits. It is not a crisis -- the world has changed and it is ludicrous to carry on at the breakneck speed of three years ago," said one official familiar with the matter, declining to be named because he was not authorised to speak publicly on development strategy.
Another, senior Abu Dhabi government official said: "A review doesn't mean slowing or cancelling projects. It is a pragmatic approach in a changing world.
"We have seen changes that impact all of us and there are international partners for many of these projects. You have to be patient."
At the same time, some parts of Abu Dhabi's development strategy are proceeding without change or have been accelerated.
One is the construction of middle income housing for its citizens, part of a Gulf-wide trend to improve social welfare after political unrest elsewhere in the Arab world; initiatives launched by the government this year include building 7,500 new homes for nationals in the emirate and 500 new villas for Emirati families on Yas Island.
"The government has continued in its projects, for example the infrastructure projects, the education projects, the health care, all of those are ongoing," Fahad al-Raqbani, Director General of the Abu Dhabi Council for Economic Development, an economic policy advisory council, told Reuters.
"In fact, there is an increase in the budget for specific sectors, namely for the housing, health care and education."
Raqbani said Abu Dhabi's ambitious plan to diversify its economy, which envisages lifting the non-oil share of gross domestic product to 64 percent in 2030 from roughly 50 percent now by developing sectors such as tourism, financial services and even aerospace, remained on track. "The best way to protect your economy is by having a diversified economy, not solely focused on a single sector," he said.
Abu Dhabi's new priorities may hurt its real estate and construction sectors in the immediate term. Citibank forecasts a nominal decline of 5 percent in construction this year and flat activity in real estate.
In the longer term, however, fewer big government-backed projects could rekindle private sector demand by making the property market more price-competitive.
"While the steps being made by Abu Dhabi government to consolidate projects and government entities and re-prioritise investment are having a short-term negative impact on the market, these moves are highly positive for the medium term market outlook," said David Dudley, head of Jones Lang LaSalle's Abu Dhabi office.
"The market is taking a short-term hit for longer-term benefit."
Barring an extended plunge in global oil prices, which is not happening despite the weakness of the world economy, Abu Dhabi's overall growth looks solid. Real GDP growth is estimated at about 4.5 percent this year and in the same area next year, Mohamed Omar Abdulla, Undersecretary at the emirate's Department of Economic Development, told Reuters last month.
Dubai's retrenchment has been seen by markets as underlining its financial weakness; companies in the emirate are still restructuring tens of billions of dollars of debt. But because of Abu Dhabi's massive financial resources, its own change of strategy may be received positively and ultimately encourage international investors to cut the premium which they demand for buying Abu Dhabi debt, which is partly the result of the secrecy surrounding its accounts.
Abu Dhabi, which has contributed at least $10 billion to bailing out Dubai, may conceivably be required to provide more money in coming years. But this urden would be small compared to the size of Abu Dhabi's sovereign wealth fund, estimated at around $600 billion.
Affirming its AA credit rating of Abu Dhabi in September, Fitch Ratings estimated the emirate would enjoy a budget surplus amounting to a double-digit percentage of GDP this year.
Citibank forecasts a surplus of 60 billion dirhams ($16.3 billion), or 8.2 percent of GDP, with the budget staying in surplus for the foreseeable future.
"We believe that Abu Dhabi has the fiscal space to pursue its economic priorities and support direct government debt comfortably," Citibank said.
Raza Agha, senior Middle East and North Africa economist at RBS, said in a report: "We view the reported slowdown/consolidation in Abu Dhabi as a long term credit positive...
"We feel the emirate would be much better served investing at a lower pace, and perhaps in a more focused manner that improves the quality of life for locals. Beyond that, headline grabbing projects and investments are unlikely to yield dividends even in the long run and may actually serve to create greater uncertainties in the short term." - Reuters