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The UAE has become the latest example that no oil producer is immune to the effects of low prices—regardless of what line officials may be touting.
Early last month, the Energy Minister of the emirates said that the UAE was not affected by low oil prices because of its diversified economy. Now economic stats for April have been released, and they reveal quite a different picture.
For one thing, the April purchasing managers’ index for the UAE dropped by almost two points from 54 in March to 52.8. Although any reading of a metric above 50 means economic expansion, in the UAE this expansion – in manufacturing and services but not counting the oil industry – is slowing.
For another thing, employment is stalling, with the April reading at 50, down from 51.5 in March. Basically, although all seems in order and the private sector is doing well, companies are not hiring, in spite of a solid order backlog, according to Khatija Haque, the regional head of research for Emirates NBD.
A third factor pointing to a slowdown is the latest financial results released by UAE banks. All of the big lenders in the emirates reported profit declines for the first quarter of the year, weighing on the stock market.
Apparently, however diversified an economy is, if oil is one of the main contributors to budget revenues, the whole economy will suffer, although, to be sure, the suffering of the UAE is mild compared to some other oil producers.
This combination of factors has had its effect on the housing market as well, which is good news for homebuyers and real estate investors.
According to a note from Standard & Poor’s, house prices in the emirates will shed an average 10 percent of their value by the end of the year, which comes on top of a 10 percent reduction in 2015 as oil dropped lower and lower.
The rating agency explained in the note, however, that there are no signs of demand picking up despite the more favorable price environment in real estate. This suggests that real estate investors and homebuyers are either waiting for further price falls, or that this greater affordability of housing brought about by the oil price depression is not enough to stimulate demand. The latter seems to be true in regards to investors operating in currencies different from the greenback. The dollar has performed well so far this year, making UAE real estate more expensive for non-dollar investors.
So, it’s a buyers’ market in Dubai and Abu Dhabi, as long as the buyer has dollars. And yet, it’s only fair to note that there is truth to the words of Energy Minister Suhail bin Mohammed Faraj Faris Al Mazrouei. The UAE may not be completely immune to the effect of low oil prices, but it is without question doing infinitely better than Saudi Arabia, Libya, Iraq, Nigeria, or Russia.
A diversified economy is indeed the best guarantee against price shocks in any one industry. The UAE economy may slow down for a while but it will pick up pace again much more easily than those over-reliant on oil revenues.
Read the original article on OilPrice.com. Copyright 2016.