UAE remains stable, but regional worries persist
Economic headwinds and spillovers from global markets are likely to affect domestic shores next year
The UAE, seemingly, has been on a roll this year. Dubai in particular had an eclectic calendar of events in the second half of the year as it opened doors to Dubai Opera, four amusement parks, inaugurated the final phase of the 12-km manmade canal that has given Venetian appeal to the desert landscape, and launched projects that are expected to lure investors and tourists in big numbers to its shores. However, under the veneer of superlative announcements and activities are the realities of suppressed revenues and concerns of the spillover effects from the global markets. The overall annual growth in gross domestic products, or GDP, of the UAE has slowed to a projected 2.3 per cent in 2016 from 3.4 per cent in the last year. Next year, according to the International Monetary Fund, will remain tough and see only a modest recovery to 2.5 per cent.
This is in line with the limping growth in advanced economies. The world at large is suffering from weak growth in global trade, diminishing capital flows, and stubbornly low commodity prices.
“UAE has been weathering the fall in oil prices relatively well. Inevitably, growth has slowed to a projected 2.5 per cent in 2016 due to fiscal headwinds and tighter financial conditions. We are projecting headline growth to slow to 1.4 per cent in 2017, although this will mainly be due to expected oil production cuts in Abu Dhabi in line with the recent OPEC agreement. Non-hydrocarbon sector growth is projected at 2.4 per cent,” says Giyas Gokkent, Senior Economist, Africa and Middle East, The International Institute of Finance.
As per the World Bank, too, the growth outlook
decades of policymaking are already focusing to reduce uae’s dependence on oil revenues and bolster other investments. currently, the uae is the least oil-dependent economy in the Gulf is one of slow recovery averaging 2.5 per cent between 2016 and 2018.
Low oil prices in the last two and half years, and subdued spending and expenditure in the private sector are the main reasons for the low fuel in the economic engines. Going forward, increase in interest rates could further tighten liquidity in the market, and have a knock-on effect on the private sector investment. “Lower public investment and appreciation of the US dollar, which is hurting non-oil exports of goods and services, are some of the factors weighing on the non-oil sector. In addition, we expect at least two more 25 basis point interest rate hikes by the Federal Reserve. The Central Bank of the UAE will increase its policy rates in step and financial conditions will tighten further,” adds Gokkent.
In contrast, government-driven infrastructure projects and spending have sustained momentum and kept the motors of economy buzzing. Dubai recently concluded the second phase of the $1-billion waterway project that has added more than 6km of extra waterfront to the emirate. It is also propping up investment activity in the run-up to Expo 2020. The six-month long fair is expected to attract more than 25 million visitors, and bring in foreign investments between $100 to $150 billion in Dubai and UAE across various sectors of the economy such as real estate, tourism, retail and education. Consequently the activity would churn re-investment into the country. However, the multiplier effect from this recovery is expected to be weaker than in previous investment cycles.
On the policy front, some key initiatives taken this year would benefit the emirates in 2017 and beyond, and prevent any spillover effects on the domestic economy. In October, The President, His Highness Shaikh Khalifa bin Zayed Al Nahyan issued the bankruptcy law, which will work in the favour of banks and small and medium enterprises. The sector is a vital player in the private sector. Around 350,000 small and medium enterprises make up for about 94 per cent of the total companies operating in the UAE, and employ about 86 per cent of the total work force on its role. The contribution in terms of economic isn’t small either, adding about 60 per cent to the GDP. Protecting these firms, and giving them an option to restructure debt would help banks as well as these businesses.
The government is also working out contours of a new mining law. In addition to these, the UAE has already deregulated fuel prices in 2015. It was the first country in the Gulf to do so. This year, it introduced a municipal fee on expat home rentals in Abu Dhabi, and airport fees in Dubai, Sharjah and Abu Dhabi.
With an externally facing economy, measures like these are helping spur economic activity at home and attract fresh investments from abroad. “While oil prices are expected to remain at these levels for the foreseeable future, the opportunity is to make the economy function more efficiently. This can be done, for example, by further reducing distortions in the economy by cutting subsidies or encouraging more foreign investment, looking at ways to unlock efficiencies in various sectors and so on. Such steps would make the UAE economy more competitive globally,” says Gokkent.
Decades of policymaking are already focusing to reduce UAE’s dependence on oil revenues and bolster other investments. Currently, the UAE is the least oil-dependent economy in the Gulf. Around three quarters of GDP is derived from sources other than oil, owing to Dubai’s services-oriented economy and diversification into industry, tourism and financial services in Abu Dhabi. Abu Dhabi’s 2030 Economic Vision Plan, and Dubai’s 2021 Plan further plan to invest heavily in its non-oil base, particularly export-oriented service sector, that will help shore up current account surpluses.
The UAE ranks favourably on several global lists and parameters, which adds to its business appeal and environment. The policy of economic diversification is one of the key pillars of success and so far has ensured resilience, resulting in increased capability to address difficulties and challenges.
Instability in the region, particularly in Yemen and Syria, and an expansionist Iran, could further upset efforts at recovery and divert funds and resources away from domestic shores. suneeti@khaleejtimes.com