United Arab Emirates: Risk Assessment
Country Risk Rating
Business Climate Rating
- Relatively diversified economy compared to its Gulf neighbors
- Trade hub of the region
- Political stability
- Stable currency with the peg to the dollar
- Expo 2020 and fiscal stimulus support growth
- Uncertainty about the period aftermath of Expo 2020
- Dependence of export and fiscal revenues on oil
- Vulnerability of Dubai to the debt-laden government-related enterprises
- Slow increase in domestic demand
Expo 2020 and non-oil growth compensate low oil prices’ impact on growth
Continuously low oil prices represent a drag on the UAE’s economic growth. Although OPEC+ countries are likely to expand their agreement about cutting oil supply beyond the current March 2020 expiry date, crude prices are not expected to record a strong increase in the next quarters. This trend will weigh on the UAE’s oil production and its overall growth performance, as oil accounts for nearly 30% of GDP. On the other hand, the non-oil sector is expected to continue taking advantage of the accommodative fiscal policy, although its growth pace might slow down, as indicated by Emirates NBD purchasing managers’ index (PMI), which averaged 52.6 points in Q3 2019, nearly a seven-year low. Higher international arrivals for Dubai Expo 2020 are also expected to support non-oil growth. Dubai Expo, which will run from October 2020 to April 2021, is expected to attract 25 million visitors, with 70% from outside the UAE. Although this can be seen as an optimistic estimation, even a partial realization would contribute to the growth of the retail, transport and tourism sectors. This temporary boost will support local employment, which in turn is expected to sustain private demand. A more expansive monetary policy, as the UAE central bank is following the US Fed’s footsteps due to the currency peg regime, will also support domestic demand. Moreover, the improving business environment will continue to attract foreign investments. The United Arab Emirates received USD 30.4 billion in foreign direct investment (FDI) between 2016 and 2018, equivalent to 2-2.5% of GDP, according to the World Investment Report 2019 released by the United Nations Conference on Trade and Development. Abu Dhabi’s USD 13.6 billion economic diversification program, announced in late 2018, would also increase the opportunities for new investments. Despite this positive outlook, some challenges persist. Indeed, activity in the construction sector can be weakened, as preparations for the Expo 2020 are ending. The real estate sector is already suffering from falling prices (estimated to around 35% since the peak in mid-2014) and chronic oversupply. The end of the Expo 2020 can result in serious overcapacities in certain sectors.
Budget deficit to widen to several-year high, hit by fall in oil exports
Lower oil prices caused a return to a fiscal deficit in 2019, and this trend is expected to continue in 2020 on the back of fiscal stimulus. Nearly half of fiscal revenues come from oil. As a result, the bearish expectations about oil prices, due to a slower global growth coupled with lower oil production will widen the UAE’s budget deficit, despite the approval of a zero-deficit federal budget in late 2019. However, the level of public deficit being low, and as investors see the robust wealth fund of Abu Dhabi as an implicit guarantee of repayment, the country will not face serious problems in raising funds to finance its fiscal deficit. Yet, Dubai’s public sector debt (wider than the general government’s) poses a challenge. The Emirate’s large Government Related Enterprises (GREs) carry a combined debt equivalent to nearly 70% of Dubai’s GDP and 20% of UAE’s GDP. Any sharper-than-expected downturn in the global economy, or a severe slowdown on the real estate market, would push Dubai’s debt to GDP ratio upwards, as it would oblige the government to take over part of the GREs’ debt. Nevertheless, those risks seem quite mitigated for now. The UAE’s net international investment position is estimated by the IMF at 149% of GDP as of the end of 2017. The central bank’s foreign assets, which stand above USD 100 billion (the equivalent of around 4 months of imports), considerable assets within Abu Dhabi’s sovereign wealth fund, and a large current account surplus will continue to offer solid financial buffers to the country. Having said that, hydrocarbon prices will continue to play a key role in export revenues.
Political stability expected to remain intact
The UAE is a federation of seven emirates and is one of the most politically stable countries in the Middle East region. The Federal Supreme Council is composed of seven Emirs and elects the President. The cabinet is appointed by the Federal Supreme Council and is led by the Prime Minister. Currently, Khalifa bin Zayed al-Nahyan is the President of the UAE and the Emir of Abu Dhabi, while Mohammed bin Rashid al-Maktoum is the Vice-President and Prime Minister of the UAE, and the ruler of Dubai. The level of transparency remains low despite some efforts. The well-developed social benefit system is largely built on heavily oil-funded public spending. Domestic opposition is negligible. Strong relations with the US strengthen the country’s position in the region. Qatar and Iran can be seen as the UAE’s rivals, yet the risk of confrontation remains quite low. The UAE, together with Saudi Arabia and other mostly Sunni Arab States, began airstrikes in Yemen in 2015. However, the UAE has been withdrawing its troops from Yemen since July 2019.