UNITED ARAB EMIRATES

Euler Hermes forecasts the UAE's economy to contract by around -6% in 2020 as a result of a triple shock: the Covid-19 pandemic and global crisis, the global oil price collapse in the first half of the year and (resulting from the latter) the renewed deal by OPEC and some non-OPEC members (called OPEC+) from April to limit oil production in order to stabilize prices. Even before the Covid-19 crisis, the economy of Dubai – the second largest and economically important emirate – was already showing weaknesses, reflected in overcapacities in the hotel sector, falling real estate prices that also pose financial stability issues and a faltering construction sector. The Covid-19 crisis will substantially reduce external demand for UAE exports while domestic confinement measures will adversely affect non-oil GDP. The important tourism sector will be hit hard in 2020, especially since the EXPO-2020 event in Dubai has been postponed by one year (now scheduled from October 2021 to March 2022). Moreover, the renewed cuts in oil production will weigh on activity in the oil sector. The tentative forecast for 2021 is a modest recovery to around +1.5% growth, assuming that the EXPO-2020 will take place as rescheduled. In any case, the already weak construction sector is forecast to take a further hit in the next three years as the preparations for the EXPO are coming to an end. Overall, it perhaps will take several years for real GDP to return to pre-crisis levels. In the private sector, the risk of non-payment is expected to rise.

The UAE’s fiscal breakeven oil price (at which the fiscal account is balanced) hovered between USD60 and USD70 per barrel of oil (USD/bbl) from 2015 to 2019. Hence, substantially lower oil prices and thus much reduced oil revenues since H2 2014 moved the fiscal account into deficit in four years in that five-year period. Yet, the average annual shortfall in the UAE (-1.4% of GDP in 2015-2019) was moderate and much lower than in neighboring Saudi Arabia (-10.5%), Oman (-13.2%) and Bahrain (-14.5%).

In 2020, fiscal spending will increase markedly due to fiscal stimulus measures to mitigate the impact of the economic crisis, while the average oil price is forecast at less than USD50/bbl. This together with a crisis-induced drop in nominal GDP will result in a large fiscal deficit of around -9% of GDP, followed by another shortfall of -5% or so in 2021 as the recovery is projected to be very modest. However, financing of these deficits will be no problem thanks to the huge assets held in SWFs. Total public debt (including domestic debt of government-related entities) is forecast to rise from 52% of GDP in 2019 to around 65% in 2021. But again, this relatively high ratio as compared to peers is not a reason for serious concern as the UAE is in a solid net creditor position, thanks to public foreign assets of around USD900bn (including SWFs), which is more than 200% of GDP.

Lower oil prices and oil output in 2020 will lead to a drop in the annual current account surplus from an average +7.1% in 2016-2019 to just +1% in 2020, according to our forecasts. As oil prices will recover only slightly in 2021, the external surplus will remain small (by historical standards) at +3% of GDP or so in 2021. But thanks to the UAE’s more diversified economic structure, a shift into external deficits (as will occur in other GCC economies) will be avoided.

Gross external debt is forecast to rise from 76% of GDP in 2019 to around 80% in 2020 and to fall back to 76% or so in 2021. While this is relatively high as compared to peers, again the huge foreign assets held by the central bank and SWFs provide the UAE with a large liquidity cushion.