United Arab Emirates: Risk Assessment
Country Risk Rating
Business Climate Rating
- Higher, and progressing, degree of economic diversification outside of hydrocarbons compared with neighboring countries
- Commercial and air hub of the region
- Significant financial buffers
- Rapid development of renewable energy
- Political stability
- Growing regional challenges to their prominent position as a trade hub
- High dependence of fiscal and external revenues on hydrocarbons
- Dependence on foreign labor (85% of the population is foreign)
- Concentration of the national workforce in the public sector
Growth will accelerate in 2022
Economic growth in the United Arab Emirates (UAE) will accelerate in 2022 due to rising hydrocarbon production and exports. A substantial rise in oil revenues will also boost domestic demand. Private consumption (35% of GDP) should be the critical driver because of economic normalization thanks to the high vaccination rate (90%), rising confidence, and some reforms implemented by the authorities to attract foreign workers and residents who had deserted in 2020 (i.e., long-term residence visa, retirement visa, prohibition on keeping employees’ passports, protection against unemployment, etc.). Despite ending in March 2022, the Expo 2020’s boost to employment will also sustain household spending. Tourism revenues (around 8% of GDP in 2019) could increase to USD 40 billion in 2022 from around USD 25 billion in 2021, thus exceeding pre-COVID levels, thanks to the Expo, the Qatar 2022 World Cup, and the introduction of multiple entries and long-term tourist visas. The withdrawal of the last OPEC+ production restrictions in 2022 will be the other main growth driver. After rising by nearly 14% in the first four months of 2022, the UAE’s hydrocarbon production (around 30% of GDP) should increase by almost 13% in 2022. Investments (20% of GDP) will also increase, backed by the economic diversification plan of Abu Dhabi and the increase in hydrocarbon revenues. The emirate announced plans to invest USD 6 billion over the next five years in cultural and creative industries to reduce its dependence on oil after spending around USD 2.5 billion in the past five years. On the other hand, Abu Dhabi National Oil Company (ADNOC) launched a five-year USD 122 billion plan to increase its crude oil production, which will support both investments and exports. The authorities are also trying to develop the natural gas industry and clean energy. In November 2021, ADNOC announced investments of up to USD 6 billion to enable drilling, boost its oil production to 5 million barrels per day (m/d) by 2030, and reach gas self-sufficiency. The construction sector (9% of GDP) is expected to grow by around 3% in 2022, supported by the further development of the railway network and solar power plants, after collapsing by 10% in 2020 due to the sharp fall in tourism and expatriate population. The delayed Expo 2020 helped the construction sector in 2021, but the project pipeline for commercial and residential buildings will be weaker in 2022 as many of the projects have been completed. Nevertheless, projects such as Heart of Europe, Hassyan IWP project, and Ruwais expansion will continue to sustain the sector. The U.S. Fed’s hiking process will push the UAE’s central bank to increase its rates to maintain the currency peg. However, this should have little impact on activity, although the competitiveness of non-oil sectors could suffer.
The current account surplus will rise thanks to higher oil prices
High oil prices (20% of total merchandise exports) and removing the OPEC+ cap on oil output will allow hydrocarbon exports to surge by around 65% YoY in 2022. Regarding non-oil exports, growth in the key trading partners, such as Saudi Arabia, the U.S., China, and India, will result in higher demand for polymers, chemicals, jewels, gold and diamond re-exports, sulfur, limestone, cement, glass, metals, machines, etc. The rise in tourism revenues on the back of Expo 2020 will improve the trade-in services surplus. The high level of vaccination and the removal of all travel restrictions for vaccinated people will allow the country to benefit significantly from international tourist inflows. New variants of COVID-19 remain a downside risk to this outlook, as they could entail the closure of borders. On the other hand, the secondary income balance should remain in deficit because of higher service payments and remittance outflows from foreign workers. The UAE will continue to benefit from significant financial buffers. As of February 2022, the central bank had nearly USD 130 billion in foreign exchange reserves, equivalent to over five months of imports. The Federation is estimated to have around USD 700 billion of assets in its sovereign wealth funds. High oil prices will also boost fiscal revenues, 50% of which are generated by hydrocarbons. Meanwhile, rising private consumption will increase non-hydrocarbon-related revenues. The government has recently announced that it aims to increase spending by 1.23 billion dirhams (USD 335 million) in the 2022 budget, while payments are estimated to be 375 million dirhams higher, resulting in a substantial surplus.
Political stability will remain, and regional competition will be on the rise
The UAE should remain one of the most politically stable countries in the Gulf region. It will continue to have close relations with the U.S. Improved relations with Israel will open doors for new investments and trade opportunities, particularly in the tourism, infrastructure, and technology sectors. Economic ties between the UAE and Turkey are also growing more potent, offering more significant opportunities, especially for trade and investment. Rising competition with Saudi Arabia may be economically challenging as some Saudi decisions (i.e., pushing multinationals to move their operations to Saudi Arabia) threaten the UAE’s global, regional, shipment, and trade hub position. However, this competition is expected to remain on the economic front and not affect their political cooperation. The UAE announced a series of programs worth USD 150 billion in September 2021 to diversify its economy away from oil will feed that competition. Maintaining neutrality in the Russia-Ukraine war has allowed the UAE to keep its trade and tourism relations with Russia intact. In balancing the regional powers, the country should continue to hold closer ties with Syria to keep Iran’s influence under control.