United Arab Emirates: Risk Assessment
Country Risk Rating
Business Climate Rating
- Political stability
- Progressively diversified economy
- Liberal trade regime, growing integration with the world
- Financial hub in the region
- Strong financial buffers, improvement of the fiscal position
- Business friendly environment, modern infrastructure
- Limited flexibility of the monetary policy due to the currency peg regime
- Exposure to volatility in oil prices
- Reduced tourism flows to Dubai
Better growth perspectives due to higher oil prices and public spending
Despite having been negatively affected by lower energy prices, the UAE’s economy has benefited from its relatively diversified economy (total non-oil activity accounted for 71% of GDP in 2017). After recovering strongly in 2018, the growth is expected to accelerate during 2019. This improvement will be largely due to a higher level of oil production, higher oil prices, and increased government spending ahead of Expo 2020 (a universal exposition that will be held in Dubai). However, overall growth performance is expected to remain below its 2013-2017 average of nearly 4%.
The mining sector, which includes oil and natural gas production; will be positively affected by higher oil production following the expiry of the OPEC production cap, and increased energy prices. As of September 2018, UAE oil production already stood at 3 million bpd. This increase will contribute to growth performance.
Investments recovered in 2018 and are expected to strengthen during 2019 on the back of higher fiscal revenues. The government will be able to support the economy through a more supportive fiscal policy. Indeed, in June 2018 Abu Dhabi announced a 3-year AED 50 billion programme (USD 13.6 billion; equivalent to 1.2% of Abu Dhabi’s annual GDP) in order to promote growth, tourism and job creation. Also, the UAE has approved a USD 16.4 billion budget for 2019, a 17% increase from 2018. Private consumption remained under pressure in 2018 due to higher fuel prices, a new VAT, and the removal of some subsidies. However, higher government spending and improving growth should support household spending throughout 2019.
Because government spending depends on oil prices, their volatility presents a significant risk. Although the UAE’s economy is relatively diversified, oil revenues are still the main source of finance for economic activity (53% of total fiscal revenues in 2017). Separately, a tightening monetary policy stance also will represent a challenge for the private sector’s financing costs. The UAE dirham is pegged to the US dollar and the UAE central bank follows the footsteps of the US Federal Reserve. This means that interest rates in the UAE will likely continue to rise, weighing on the funding costs of companies. Tourism flows will be an important factor during 2019: the travel and tourism sector accounts for nearly 5% of the UAE’s national output. However, tourism flows in Dubai inched up by only 0.4% in January-August 2018 from a year earlier because of weaker economic growth in visitors’ countries (Iran, Oman, Saudi Arabia, etc.) and higher accommodation and restaurant prices after the introduction of the VAT.
Fiscal improvement on the horizon
After tightening in 2017, the fiscal stance has been slightly easing since 2018 on the back of higher oil revenues. In the first quarter of 2018, total spending rose nearly 16% from a year earlier, compared with an increase of 3.5% in total revenues. The return to a budget surplus is expected to also be supported by higher non-oil revenues in line with the increased economic momentum. Reduction in fuel subsidies and reduced capital transfers to government-related entities (GREs) should help to sustain the budget balance in positive territory. Meanwhile, despite the need to finance the budget deficits between 2015 and 2017, the general government gross debt level relative to GDP has remained low. Additionally, the UAE will continue to enjoy strong financial buffers with the sovereign wealth fund’s assets estimated at more than 300% of GDP.
The UAE is considered as a “safe haven” for investments in the region and the economy was not significantly affected by the boycott imposed on Qatar in June 2017.The country, which is a constitutional federation, is governed by the Federal Supreme Council. It consists of the leaders of the seven emirates. The Federal National Council, which is the consultative council, has 40 members, of which half is elected and the rest is appointed by the rulers of the seven emirates. The latest election was held in 2015 and the next one is due in 2019, where no substantial changes are expected. The country is expected to remain politically stable, and should therefore continue to attract foreign investments.