United Arab Emirates: Risk Assessment
Country Risk Rating
Business Climate Rating
- Political stability
- Diversified and business-friendly economy
- Liberal trade regime
- Financial hub position for the region
- Strong financial buffers
- Limited flexibility of the monetary policy due to the currency peg regime
- Lack of transparency of the quasi-public entities
- High import reliance of the industry
- Still dependent on hydrocarbon revenues in terms of fiscal performance
Improved Growth Perspectives for 2018
The UAE economy remains one of the most diversified economies in the Gulf Cooperation Council (GCC) region. This diversity has made it an outperformer in the region and has prevented its economy from falling into recession in the current era of lower energy prices (since 2014). The UAE will also benefit from big international events, such as the Dubai Expo 2020 and the Qatar 2022 World Cup, as they will increase tourism in the region. Further increases of oil prices, coupled with easier fiscal consolidation, are set to help the economy register higher growth rates in 2018.
In Dubai, investments related to Expo 2020 – which is expected to attract more than 25 million visitors from 180 countries – play an important role in the development of the tourism, hospitality, real estate, construction, transportation, and infrastructure sectors. Business confidence figures indicate that operating conditions in the non-hydrocarbon sector continue to improve as well. Government-supported construction activities are also set to contribute to investments, which will likely inch up over the coming quarters.
Private consumption will likely remain among the main growth drivers in 2018, sustained by household consumption and higher international tourism. The introduction of a VAT in 2018 is not expected to represent a significant drag on growth. However, subdued oil prices will likely prevent the economy from recording growth rates as high as pre-2014 levels. The UAE is affected by production cuts as agreed with OPEC and non-OPEC countries. In particular, Abu Dhabi’s economy – which relies on the hydrocarbon sector for around half of its GDP – has been affected by the output cap. As of September 2017, the UAE’s oil production has declined by 2.5%, compared with its level in 2016. A slower hydrocarbon sector impacts the whole economy – not only through production but also through government expenditure and investors’ sentiment. Meanwhile, non-oil sectors look more positive: recent recovery in oil prices has led to some recovery in consumer and business sentiment, driving non-hydrocarbon investments.
Fiscal Improvement in the Horizon
Lower oil revenues have weakened the UAE’s fiscal and external positions. The government has therefore introduced certain fiscal tightening measures, such as removing fuel subsidies, raising electricity and water tariffs, and postponing transfers to government-related entities (GREs). Via these measures, the government has tried to maintain fiscal sustainability, despite persistently low oil prices. Indeed, the government has been seeking to remain committed to its 2021 Vision, which includes a set of national indicators in education, healthcare, economy, government services, security, etc. With solid financial buffers, authorities are able to use withdrawals from these funds to finance the budget deficit. As of August 2017, the UAE’s central bank had AED 335.4 billion dirhams (Emirati dirham; USD 90.6 billion) as net international reserves. The Abu Dhabi Investment Authority (ADIA) is believed to have USD 828 billion as of June 2017.
With the slow recovery in oil prices since early 2017, the budget deficit will start to narrow. This is set to result in higher spending on infrastructure, construction, and investment, as the government should ease fiscal consolidation to sustain economic activity. The budget is expected to be balanced in 2021 and start to produce small surpluses afterward. The government also uses external borrowing through bond issuance in international financial markets. Higher non-oil exports, thanks to rising global trade volume and tourism revenues, will help to sustain the current account surplus as well. The appreciation of the US dollar on the US Federal Reserve rate hikes would also help the dirham to appreciate, as it is pegged to the US dollar. This may affect the competitiveness of non-oil exports.
The UAE stands apart from the region’s instability and is considered as a “safe haven” for investments. The country participated in the Qatar boycott, which began in June 2017. The longer the crisis continues, the more investment appetite and bilateral trade flows will be affected negatively in the region. On the other hand, in the short term, the country will benefit from arrivals of GCC tourists who would normally visit Qatar, but will now visit the UAE instead. The country should remain attractive for investors thanks to its political stability.