United Arab Emirates

Resilient thanks to SWFs

BB1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD414bn (World ranking 29, World Bank 2018)
Population 9.63mn (World ranking 92, World Bank 2018)
Form of state Federation
Head of government H.H. Sheikh KHALIFA bin Zayed Al Nahyan
Next elections 2023, legislative
  • Regional co-operation through the GCC
  • Political and social stability, with established method of succession
  • Abundance of natural resources (hydrocarbons)
  • Large asset holdings and investments held overseas; net creditor status
  • Strong financial hub thanks to the Abu Dhabi sovereign wealth fund
  • Actively diversifying economy
  • Relatively liberal business and trading environment
  • Solid fiscal and current accounts, despite some short-term effects from currently weaker oil prices
  • Despite diversification (including further developments in the transport and travel sectors), the economy remains subject to the vagaries of international oil and gas markets
  • High dependence on global and regional markets and events
  • Fixed exchange rate peg to the USD prevents independence of monetary policy
  • Speculative flows (stock market, real estate etc.) provide some concern of asset bubbles
  • Data provision is poor for a high income economy
  • Regional instability

Growth is gradually recovering

The UAE has proven resilient despite the strong decline in oil prices in 2014-2016. Economic diversification has lowered oil-dependency (today oil accounts for only one third of total exports) and promoted non-oil growth, mainly in the financial and tourism sectors. Still, the overall economic cycle is influenced by the country’s oil output.

Since 2017, recurrent deals by OPEC and non-OPEC members (called OPEC+) to limit oil production in order to stabilize oil prices have affected oil-related growth in the UAE. Real GDP growth fell to +0.8% in 2017 from an average annual +4.2% in 2014-2016. As those cuts were cancelled in June 2018, the UAE’s oil output increased markedly until the re-imposition of the cuts at end-2018, resulting in full-year growth of +1.7% in 2018. In mid-2019, OPEC+ announced it would extend the production cuts until March 2020.

As the non-oil sector was weak in 2018 (+1.3%), the Emirates announced massive fiscal stimulus packages, as well as cost-cutting measures for key industries, including aviation, real estate and education, for 2019. Combined with ongoing investment related to the Expo 2020 in Dubai and gradually easing monetary policy, annual growth is forecast to pick up gradually to +2% in 2019 and +2.3% in 2020. Downside risks to these forecasts include the uncertain global economic outlook (notably due to trade tensions), as well as increased geopolitical risks in the Middle East region.

Exchange rate and price stability to be maintained

The UAE has a fixed exchange rate system, with the dirham (AED) pegged to the U.S. dollar at AED3.67:USD1. Despite some pressures on the currency during the low oil price period in 2015-2017, the peg held, thanks to the ample foreign exchange reserves of about USD100bn held by the Central Bank of the UAE and the additional huge reserves of 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 U.S. Fed’s mone­tary policy easing, which began in July 2019. This could support exports through improving competitiveness. Meanwhile, 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 currency peg has ensured relative price stability in the past. The introduction of a 5% VAT in the UAE in 2018 lifted inflation moderately to an average +3.1% in that year from +2% in 2017. Since the start of 2019, the country has experienced deflation (-2% y/y on average in H1) as a result of falling housing prices and the fading effects of the VAT introduction. We expect these trends to continue for most of 2019, and forecast average full-year deflation of -1.4%, followed by a return to modest inflation of about +1.5% in 2020.

Resilient fiscal and current accounts

Substantially lower oil prices, and the resulting much reduced oil revenues since H2 2014, have moved the fiscal account into deficit since 2015, though the average annual shortfall in the UAE (-2.2% of GDP in 2015-2018) has been moderate and much lower than in neighboring Saudi Arabia (-11.7%), Oman (-14.4%) and Bahrain (-15.5%). Fiscal expansion will lead to further fiscal deficits of just over -2% of GDP in 2019-2020, the financing of which should be no problem. Total public debt (including domestic debt of government-related entities) rose to a temporary peak of 62.2% of GDP in 2016 but fell to an estimated 56% in 2018. It should remain just below 60% in the next two years. Yet, 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, with public foreign assets of around USD900bn (including SWFs), which is more than 200% of GDP.

The oil price crisis also led to a sharp drop in the annual current account surplus from an average +16.2% in 2011-2014 to +4.3% in 2015-2016. But thanks to the UAE’s more diversified economic structure, a shift into external deficits (as occurred in other GCC economies) was avoided. As oil prices recovered somewhat, the current account surplus widened again slightly to about +7% of GDP in 2017-2018. We expect similar ratios in the next two years.

Gross external debt rose to a peak of 85% of GDP in 2017 but has fallen to 76% or so currently. 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.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
India 9%
1
13% China
Japan 8%
2
12% India
Iran 8%
3
10% United States
Switzerland 8%
4
7% Germany
Oman 5%
5
4% Japan

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 31%
1
9% Gold, non-monetary (excluding gold ores and concentrates)
Gold, non-monetary (excluding gold ores and concentrates) 12%
2
8% Miscellaneous manufactured articles, n.e.s.
Non metallic mineral manufactures, n.e.s. 7%
3
8% Road vehicles
Telecommunication and sound recording apparatus 5%
4
8% Telecommunication and sound recording apparatus
Miscellaneous manufactured articles, n.e.s. 5%
5
6% Non metallic mineral manufactures, n.e.s.

While the payment behavior of large domestic companies is generally good, dealing with small and medium size businesses may represent a significant risk of non-payment. Since insolvent debtors may be sentenced to a prison term,  their tendency to disappear when things turn wrong is significant.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

The legal framework is complex and the courts tend to lack independency and reliability while procedural delays and costs may be prohibitive.

Insolvency law does not provide much support when it comes to debt recovery: a debt renegotiation mechanism has been put in place but in practice it remains largely untested and liquidation prevails, thus leaving no chances of recovery to the creditors.

Download the entire collection complexity PDF:

Collection complexity United Arab Emirates

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Contact

Euler Hermes

Economic Research Team

research@eulerhermes.com

Manfred Stamer

Senior Economist for Emerging Europe and the Middle East

manfred.stamer@eulerhermes.com 

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