(MENAFN - Khaleej Times) The UAE has emerged as the obvious safe haven (with Qatar) from the geopolitical tempest that has reconfigured the social contract in the Arab world.
The oil shock is a windfall for Abu Dhabi, owner of one tenth of the world's oil and gas reserves, whose government infrastructure spending is the growth catalyst for the Federation.
The protracted political riots in Bahrain reinforce Dubai's bid to be the preeminent financial, tourism, trade services and aviation/shipping hub of the Middle East.
Global oil companies and banks have relocated the families of their staff from Tripoli, Damascus, Sanaa, Bahrain and even Cairo to Dubai in a tradition that goes back to the fall of the Shah, the Lebanese unrest and the Iran-Iraq was in the past generation. Regional capital flows will also be attracted to the UAE because political risk premia have spiked in almost every banking market in the Arab world.
Hotel occupancy rates, airport passenger traffic, school/school enrollments, traffic, Jebel Ali export volumes, bank deposit growth rates in Dubai and Abu Dhabi reflect the post-Arab spring realities.
Bahrain's future as an international financial centre could well be undermined by the current unrest. This happened to Beirut, which lost its status as the money souk of the Levant after the PLO, Druze and Phalangist militias gutted its financial district in the opening round of unrest that culminated in Syrian intervention and two horrific Israeli invasions of Lebanon. Financial centres cannot coexist with political risk. Hence the role of the UAE as a banking safe haven.
Of course, the spike in oil prices and the Bernanke Fed's easy money, a de facto devaluation of the dollar, which means imported inflation will exert upward pressure on the UAE CPI. However, the glut in the property market means rents will continue to fall, limiting the inflation shock and actually improving the affordability metrics for an entirely new generation of elite Arab investors who naturally view Dubai as the Arab Switzerland. In fact, Dubai and Abu Dhabi will morph into the leading twin global cities of the emerging Arab political constellation.
The Achilles heel of the UAE economy remains the high funding costs and anemic loan growth in the banking system, negative equity for speculators trapped in the 2008-09 property crash and the ongoing debt restructuring process of several state owned companies.
Unlike Qatar, the loan books of UAE banking have not expanded even as the economy has emerged from its worst recession since the 1980's construction bust. However, the UAE will deliver respectable, if not stellar, two to three per cent GDP growth rates.
Yet the worst is unquestionably over after the epic 24 billion debt restructuring of Dubai world and the successful refinancing of Bourse Dubai. The fall in the Dubai credit default swaps from the post-Nakheel standstill high of 550 to 380 basis points reflects the fall in risk perceptions for the UAE in the global capital markets.
The challenge for UAE economic policy makers is to boost bank credit growth to the private sector, accelerate infrastructure spending to boost GDP growth and manage the legal/regulatory frameworks that are a prerequisite for any long-term stability in the property markets.
The huge rise in commercial bank loan provisions in 2008-09 is now over and Abu Dhabi will scale up a new pipeline of infrastructure projects, thanks to the recent oil and gas bonanza.
The growth of the non-oil UAE economy will be boosted by bank credit growth and government spending. The UAE, the only successful model of political federation in the Arab world, is also destined to be the region's next economic tiger, an ancient land that is a microcosm of the Arab world's most cosmopolitan and tolerant traditions.