February 8, 2009 / 2:15 PM / 11 years ago

UPDATE 1-Dubai growth seen under 2.5 pct in '09 -govt

(Adds details, quotes, context)

By Daliah Merzaban

DUBAI, Feb 8 (Reuters) - Dubai expects its economy to expand by just under 2.5 percent this year as real estate, construction and exports come under pressure, the Gulf emirate’s chief economist said on Sunday.

One of seven emirates in the UAE federation, Dubai is witnessing a sharp economic slowdown as oil prices collapse and the global financial crisis takes its toll on real estate prices and the stock market.

Real growth in gross domestic product (GDP) in Dubai was set to fall to “slightly less” than 2.5 percent this year compared with about 8 percent in 2008, Raed Safadi told an International Monetary Fund briefing in Dubai.

“Hopefully the worst is behind us,” Safadi said. “We are being challenged on exports, on the real estate sector, construction ... all of these sectors are under pressure here.”

During a six-year building boom supported by high oil prices in the Gulf, Dubai was thrown into the global spotlight with lavish projects such as the world’s tallest tower, an indoor ski slope and islands in the shape of palm fronds and the world map.

In 2007, the government of Dubai, which derives only about 3 to 4 percent of its GDP from oil, said it aimed to grow at 11 percent a year through to 2015. That target that was reduced this year to between 4 and 6 percent.

Dubai is striving to keep its economy growing by expanding public spending despite the slowdown. The emirate said in January it expected to run its first budget deficit ever of 4.2 billion dirhams ($1.14 billion) this year.

But signs of the slowdown are evident. Companies across Dubai have laid off thousands of employees as real estate prices dropped by at least a quarter from a peak late last year after speculators exited the market, analysts have said.

Facing the risk of greater mortgage loan defaults, banks are taking massive provisions for bad loans.

Meanwhile, research firm Proleads said last week the UAE has put on hold $582 billion in construction projects, retailers are complaining of slower sales and the Dubai bourse continues to fall after slumping more than 72 percent last year.

But Safadi, who called the GDP growth forecast “ conservative”, said Dubai still managed to issue 1,000 new residency visas a day in January on a net basis.

Investors remain sceptical. The cost of insuring Dubai debt with credit default swaps has widened since an Abu Dhabi plan last week to inject 16 billion dirhams into five of its banks.

Safadi said he was “not aware” of any similar plan to inject capital into Dubai banks. ($1=3.673 dirhams)

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