United Arab Emirates: Risk Assessment
Country Risk Rating
Business Climate Rating
- Regional trading hub
- Higher degree of economic diversification compared to its neighbors
- Political stability
- Vast financial assets of Abu Dhabi
- New investment opportunities related to the normalization with Israel
- Weak oil prices weigh on growth performance
- Subdued outlook for non-oil activity
- Increasing debt, fiscal revenues mostly depend on hydrocarbons
- Lower tourism revenues due to COVID-19
- Rising regional tensions
The Dubai Expo and the recovery in oil prices will support growth
The United Arab Emirates (UAE) economy was hit in 2020 by lower oil prices, OPEC+ production cuts and the negative impacts of the coronavirus. Oil revenues (around 30% of GDP) sharply declined as crude oil production fell to 2.4 million barrels per day (b/d) in October 2020 compared to 3.1 million b/d in end-2019. In 2021, recovering hydrocarbon prices and improving global trade volumes will sustain growth. Private consumption is expected to support growth on the back of the implemented fiscal stimulus (around 3% of GDP) and improved consumer sentiment thanks to the positive news on potential vaccines against COVID-19. Low interest rates (the central bank cut its rates by 125 basis points in 2020, following the U.S. Federal Reserve’s moves), coupled with the central bank’s monetary stimulus package equivalent to 20% of GDP, will also help private consumption. Dubai Expo, which will be held from October 2021 onwards and will run for six months, may attract less than the 11 million visitors expected because of the pandemic’s conditions. Nevertheless, the event would increase employment and reinforce consumer spending. A gradual easing of travel bans and an improvement in the transport and tourism sectors will also support the growth performance. The ongoing economic diversification programs will keep the UAE as an attractive investment destination for international companies. The recovery in investment will be mild due to COVID-19 and the termination of most of the Expo-related investments. The decline in the expatriate population will continue being a drag on real estate prices, which will continue to fall in 2021, for the fourth consecutive year, because of over-supply. The recovery in the non-oil sector will be gradual due to the slow recovery in trading activity in line with the weak global growth performance, the second wave of lockdown measures and restrictive fiscal spending.
Borrowing rather than tapping into reserves
In 2019, the UAE approved a zero-deficit federal budget for 2020, but COVID-19 changed the spending plans and the budget deficit approached 10% of GDP in 2020. In 2021, the deficit is expected to persist due to the continuous need for fiscal stimulus in the economy, as the pandemic’s conditions will probably not disappear quickly. Due to the rising debt, the government has mostly prioritized measures such as reducing various government fees and charges, deferral of some payments and cancellation of certain fines, instead of large material assistance. Oil prices, which are estimated to stand below the UAE’s fiscal break-even price (estimated at USD 66.5 in 2021), will still weigh on fiscal revenues (40% of which come from hydrocarbons) and make them more volatile. However, the VAT collection, in line with the recovery of private consumption, will have a positive impact. The public debt is expected to be funded mostly by tapping into the international capital markets, on Abu Dhabi preference, instead of using the vast cash reserves. Indeed, the central bank’s gross international reserves stood at USD 98 billion as of September 2020 and the foreign assets in the country’s sovereign wealth fund are estimated at USD 743 billion (around 200% of GDP) according to the IIF. In 2018, the federal government passed a law allowing the government to issue sovereign debt. Therefore, new bond issuances are expected in 2021.
The slight recovery in oil prices, the gradual loosening of the OPEC+ production cuts and rising global demand will support the UAE’s hydrocarbon exports, which still account for a third of total goods exports. The economic diversification strategy, which is based on tourism, construction and transport, among other sectors such as services and manufacturing, will continue to sustain import demand for capital goods. The recovery in consumer spending will also increase consumer goods imports. In 2021, the economic recovery and the expected increase in activity in the tourism sector and infrastructure projects may increase the need for foreign labor, which will in turn raise the level of outward remittances. Thus, the current account balance will continue to remain in surplus, but at a lower level compared to previous periods.
Political stability intact amid rising regional tensions
The UAE are expected to maintain their political stability despite continuous tensions i.e. with Iran, Qatar blockade, turmoil in Yemen, economic and political deadlock in Lebanon, etc. The normalization of the relations with Israel is expected to pave the way to reciprocal investments particularly in the energy, agri-food, tourism, and ICT sectors. A further drop in oil prices may represent a challenge, as social order is mostly maintained through social spending and increasing the living standards through public employment. Such a situation could force the government to reduce spending and increase taxes, which both increase the risk of upsetting society. However, this risk remains low thanks to its ample financial reserves.