The second-largest economy in the Middle East, the United Arab Emirates (UAE), has just recorded business activity at a decade low, reported Reuters.
IHS Markit UAE Purchasing Managers’ Index (PMI) printed at 50.3 in Nov. from 51.1 in Oct., hitting the lowest level since Aug. 2009 and on the threshold of declaring a contraction in growth.
Last year, the manufacturing and services sectors (pretty much covering UAE’s non-oil sector) recorded growth of 55.8 but had slid to almost contraction territory by late 2019.
New orders plunged into contraction (48.9) in Nov. from 51 in Oct., which has resulted in companies discounting prices to attract new business as the economic slump continued to intensify.
“Anecdotal evidence commonly linked the decline to subdued market conditions and weaker customer demand,” said David Owen, an economist at IHS Markit.
An employment downturn was also initiated in 2019. Job levels dropped in Nov., indicating that last month was one of the fastest decline in the workforce for non-oil companies in nearly a year.
Despite UAE’s four years of economic deceleration since oil collapsed in 2014, the country is finally experiencing weakness spreading from its oil sector into the broader economy.
The country’s deteriorating property sector risks the quality of assets held by domestic banks could create banking difficulties in the early 2020s.
“Weaker asset quality will also put pressure on profitability,” said Redmond Ramsdale, Fitch’s head of Middle East bank ratings, who reently spoke with the Financial Times.
With the UAE economy and domestic banks still not fully recovered from the 2008 crisis, the economy is once again rapidly decelerating with financial turbulence likely seen in the next 12 to 18 months.
And just a reminder, UAE banks hold tens of billions of dollars in loans to Dubai government-related entities, with a maturity wall in 2021.
Dubai is currently going through a housing market downturn that has the risk of spreading contagion fears across the continent.