Dubai Will Remain Region's Unchallenged Trade Hub

Recovery in the GCC countries is set to gain momentum in the next two years and the region is not expected to lag in the global business cycle this time around, according to a new report from Bank of America Merrill Lynch (BoA ML) Global Research.

"As we do not believe GCC will lag in the global business cycle this time around and as we expect the region's recovery to gain pace in 2010 and 2011, catch-up for these markets is a matter of when rather than if, in our view," said Turker Hamzaoglu, Eastern Europe, Middle East, and Africa (Eemea) economist at the bank.

"Our meetings with corporates and officials confirm our strong macro view for the region, while clients expressed renewed interest in the Mena region, which remains the clear laggard in the rally in risky assets," said the report.

The consensus view that emerged out of the bank's 'Mena & Frontiers Conference' in Dubai last week suggests a V-shaped recovery, with the positive global backdrop supporting regional prospects, especially those of the oil producers.

The bank countered the glum consensus view on Dubai, with investors concerned about the collapse in the emirate's real estate market and the supply overhang.

"We beg to differ in our view, as we think Dubai will remain the unchallenged services and trading hub for the region. Also, higher oil prices make it cheaper for Abu Dhabi to support Dubai. The stronger credit market and improving global trade and tourism may help consolidate Dubai's non-oil economy," the report said.

The report highlighted the UAE and Saudi Arabia as "top macro picks", while the bank remains sceptical about Qatar's prospects.

Globally, the report maintained, recovery will be weak but stronger than consensus view, and rules out a double-dip recession as some economists have warned recently.

"GCC is the ultimate laggard trade. With higher oil prices, consensus thinks it will eventually catch up. Inflation is no longer a problem and there is no pressure on the US dollar pegs. Saudi Arabia should benefit from high oil prices, non-oil growth is strong thanks to infrastructure spending and stable domestic demand," said the report.

It highlighted Qatar as the fastest-growing country in the region. "But a detail that everybody ignores is that it is also the only nation to have gone into deep deflation [CPI falling 7% YoY], with prices declining in all sub-components of the CPI basket. Our rationale is simple. The healthy stream of hydrocarbon revenues does not filter into the non-oil economy, making Qatar an attractive bond rather than equity investment. As we fail to see non-oil growth in this, once the capital-intensive infrastructure projects mature, Qatar's large savings are likely to look for opportunities abroad."

It said the V-shaped recovery has become the sell-side's consensus and investors have fully priced in a strong recovery. "Global policy-makers will maintain the stimulus and err on the side of higher inflation rather than lower growth. Global backdrop is very supportive of Mena. Oil makes GCC look good."- Business 24/7