UNITED ARAB EMIRATES

The UAE’s recovery from the multiple shock of the global Covid-19 crisis and the drop in oil prices and output in 2020 will be solid. Real GDP contracted by -6.1% in 2020, but 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. Euler Hermes expects a return to robust annual economic growth of approximately +3% to +3.5% in 2021-2022 on the back of higher oil production and a rebound in the non-oil sector as domestic consumption and the important tourism sector will recover amid the lifting of lockdown measures and and the Expo-2020 event that will take place in Dubai from October 2021 to March 2022. However, the already weak construction sector is forecast to take a further hit in the next three years as the preparations for the Expo have come to an end.

Exchange rate and price stability will continue. The UAE has a fixed exchange rate system, with the dirham (AED) pegged to the US dollar at AED3.67:USD1. Thanks to ample foreign exchange reserves (over USD100bn in mid-2021) held by the central bank of the UAE and additional huge assets (approximately USD1,300bn) held by various sovereign wealth funds (SWFs), we expect the peg to be maintained over the next few years, meaning that the central bank will continue following the US Fed’s loose monetary policy stance, which should continue for several years. However, progress towards a full Gulf monetary union has been limited and we do not envisage the introduction of an effective GCC single currency in the next five years or so. The UAE’s currency peg has ensured relative price stability in the past. The introduction of a 5% VAT in 2018 lifted headline inflation moderately to an average +3.1% in that year. But from the start of 2019 until mid-2021, the country experienced deflation as a result of falling housing prices, fading effects from the VAT introduction and subdued domestic demand during the Covid-19 crisis. Looking ahead, higher energy prices, global supply-chain disruptions and the recovery in demand should lift inflation moderately to the range between +1% and +2% for most of H2 2021 and 2022.

The UAE has one of the most liberal business environments in the Middle East but environmental sustainability is an issue. Foreign investment is actively encouraged in many non-oil sectors. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are very business-friendly and corruption is negligible. The Heritage Foundation’s 2021 Index of Economic Freedom (IEF) survey ranks the UAE 14th out of 184 economies, below Canada but above Luxembourg and the US. The IEF notes low barriers to trade, a sound legal framework and regulations that support open-market policies and a favourable business climate. However, the IEF also reports remaining weaknesses regarding investment and financial freedoms. With regard to environmental sustainability, the UAE scores badly owing to the non-existence of renewable electricity output, a high level of water stress and a low recycling rate. It does somewhat better with regard to energy intensity, CO2 emissions and climate change vulnerability. Overall, however, the UAE ranks 144 out of 210 economies in our proprietary Environmental Sustainability Index. In the medium term, this could affect the country’s ability to attract capital since investors will increasingly focus on sustainability.