Dubai business model not broken, claims Rasmala

Dubai’s business model is not broken due to Abu Dhabi’s presence in the emirate, Rasmala has concluded in its latest research publication.

The investment bank said while it sees “little in the way of solid gains in economic momentum”, it “believes long-term fundamentals for a stable economy are in place”.

It said: “In particular we believe Dubai can achieve and sustain fiscal breakeven without damaging its prime draw for corporates and individuals alike – the zero tax regime.

“The survival of the Dubai business model is the key driver for almost all the banks in the UAE and not just the Dubai-based for three reasons; one, most of the Abu Dhabi-based banks have significant operations in Dubai; two, many of the Abu Dhabi-based corporates have significant operations in Dubai; and three, we believe many Abu-Dhabi-based investors have investments in Dubai. In short, the economies are fully integrated.”

Rasmala said the critical question now facing Dubai is whether its business model is broken. “If it is not, which we consider to be likely, then we expect to see a rebound in ROEs from the current 10.7 per cent sector average back to a minimum of high teens by 2012-2013.”

The report concluded that, in the long term, Dubai is in a position to pay of its debt, total debts of the Dubai government amounted to US$19bn as of September 30, 2009. However, it added: “How soon the business and investment community are willing o put their trust in this will depend on the determination of the authorities to provide clear, transparent and verifiable statistics.”

The paper, published in conjunction with Royal Bank of Scotland, said both parties do not see many signs of optimism for the property development sector, adding: “Times are tough for the property sector, but we do not believe that this should spell doom for the economy, or for the banks. The property sector is likely to continue to be a dead weight both in Dubai and Abu Dhabi.”

Credit growth is also likely to remain low, said the report. It said: “We believe Dubai will continue to see deleveraging of its economy and this will restrain credit growth to single digits, perhaps around 5 per cent, until 2012. Abu Dhabi should fare better, particularly due to the lower likely penetration of retail loans, greater stability of the labour market and expanding infrastructure investments, although we do not expect credit growth to exceed 20 per cent.”