UAE companies' first-quarter earnings reports are expected to show signs of recovery, but debt issues in Dubai's financial sector still threaten to trample any green shoots.
There were clear signals of strength in the sectors that fuel the traditional economic motors of Dubai and Abu Dhabi, said Liz Martins, an economist at HSBC Middle East.
"Dubai's key strengths - trade, services, tourism - seem to be an area of strength at the moment," she said. "But the economy as a whole does continue to look quite sluggish."
HSBC expects aggregate quarterly net profits for companies in the Middle East and North Africa (Mena) to increase by 5 per cent, compared with the same period a year earlier. UAE companies covered by the bank are expected to generate a 5.2 per cent rise in quarterly profits.
Other analysts expect that the bad debt working its way through the UAE's banking sector has largely dissipated, leaving some banks more strongly positioned. Global Investment House,a Kuwaiti investment bank, expects a 10 per cent dip in UAE corporate profitability among the companies it covers, weighed down by a 60 per cent decline in first-quarter profit at Emirates NBD.
Stripping out the Emirates' biggest lender, companies covered by Global Investment House are expected to generate a 10 per cent rise in aggregate earnings, with Abu Dhabi banks expected to see strong growth.
The aftermath of restructurings at Dubai World and Dubai International Capital left many local lenders stricken as they dealt with the after-effects of a binge of cheap credit, which has hamstrung their ability to lend to businesses and drive economic growth.
Some issues remain. Exposures to Drydocks World, which recently sought insolvency protection as part of efforts to push through its US$2.2 billion (Dh8.08bn) restructuring, are expected to be particularly painful for lenders.
Dubai Group's $10bn debt restructuring is still being negotiated, while the effects of European bank deleveraging could still afflict local lenders.
But a rally in stock market activity should also boost brokerage revenue for banks that still operate that service.
Dubai's stock market entered a bull market during the first quarter, with the Dubai Financial Market General Index rising 21.8 per cent. The Abu Dhabi Securities Exchange General Index advanced 6.2 per cent in the period.
The recent run-up in UAE stock market values could leave many companies with large investment gains on their portfolios, boosting overall profits, said Talal Touqan, the head of research at Al Ramz Securities. The brokerage expects corporate earnings to increase by 10 to 15 per cent.
"Most of the financial sector companies and insurers have portfolios in the stock market … Mostly they're focused on the real estate sector in Abu Dhabi," he said. "That's the main boost for the financial sector, while other sectors are getting better off, such as hospitality and telecoms."
Growth among banks should be stronger in the capital than in Dubai, driven by higher government spending, analysts from Deutsche Bank wrote in a research report.
"We see higher potential growth at Abu Dhabi-based banks, as infrastructure spending should offset slower growth in personal and property lending," the report said. "Recent news relating to the resumption of stalled projects (such as the Louvre and Guggenheim museums) supports our more positive assessment of the Abu Dhabi growth outlook." Bank lending in the UAE grew by 3.8 per cent last year to Dh1.071 trillion, largely centring on lending to the public sector, according to data from the Central Bank. Data for the first quarter is not yet available.
But the Emirates' private sector had yet to feel the effects of recovery from the global financial crisis, in contrast to other countries in the region, Ms Martins added.
"Since 2009, the whole Gulf has had that engine of growth frozen," she said. "Saudi Arabia, Qatar and Oman are seeing banks pick up and start to lend again. This isn't yet reflected in the UAE."