Morgan Stanley, the investment bank, predicts that the UAE's economic slowdown will deepen next year, with growth picking up again as part of a broad global rebound in 2010. Following the prediction by Sultan Nasser al Suwaidi, the Central Bank governor, that economic growth will slow to 4 per cent this year, Morgan Stanley said next year's growth would further drop to 3.8 per cent. In a report released on Thursday, the bank said a global economic recovery would begin in 2010, with UAE economic growth increasing to 4.7 per cent on demand for oil, tourism and real estate. But even as the global crisis deepens in the coming year, core government investment will remain strong. "We do not expect a significant reduction in spending on infrastructure, especially in Abu Dhabi, given that the funding for such projects is based on a government budget that we expect to remain in large surplus," the report said. The Federal Government's budget has not run at a real deficit in almost 20 years, with the current account balance remaining in surplus even in 1998, when oil prices averaged US$14 per barrel. Low oil prices, lower domestic spending and a significant slowdown in Russia and the UK - both key sources of tourism growth in recent years - would depress economic growth next year, the report said. But a falling property market may have less impact on the economy than many believe. The effect of lower property prices, the bank said, "would need to be weighed against the considerable wealth accumulation that took place over the past two years, during which real estate prices appreciated at a phenomenal rate". More significant will be the declining availability of credit, particularly from international debt markets. Large state-backed enterprises, such as the Dubai-based property developer Nakheel, have effectively been shut out of debt markets as their credit default risk is judged by lenders as increasingly high. A liquidity squeeze "is forcing large corporates, particularly in the real estate market, to reconsider financing plans and put certain projects on hold", said Farouk Soussa, a director of sovereign ratings at Standard & Poor's in London. Morgan Stanley reiterated the need for the Federal Government to give clearer guarantees regarding the backing of large state-owned companies. Although the bank believes such backing is implicit, it needs to be explicitly stated for businesses such as Nakheel to resume international borrowing. "A large federal guarantee would necessarily require the backing of the Government of Abu Dhabi," the bank said. "We have little doubt that an implicit guarantee is already in place. However, market participants do not seem to share our conviction, given that they are currently attaching a massive premium to the default risk of some of Dubai's quasi-public entities." Morgan Stanley believes that "a prompt, concerted and transparent strategy by the Federal Government and by the governments of the individual emirates" would make it clear to debt markets that "the authorities stand firmly behind their flagship companies". In another report released last week, Mushtaq Khan, an economist at Citigroup, said he expected governments across the GCC to invest larger proportions of their budget surpluses into domestic markets in the coming year. This focus on propping up local economies, rather than investing abroad, could lead to a major policy disparity between the GCC and the West, Mr Khan warned. As governments in North America and Europe plan large economic stimulus packages, there is an expectation that GCC and emerging-market investors will continue to fund their growing budget deficits, he said. "We believe the authorities in the GCC are likely to prioritise domestic demands over global needs," the report said. "The ability of the GCC to share its wealth is more limited than commonly perceived... policymakers in the region may have to be more careful about how they use their dwindling surpluses." tgara@thenational.ae