Despite the UAE’s overall diversification, the lower oil price is expected to take its toll on economic growth.
Middle East and North Africa economies
Atradius STAR Political Risk Rating*:
Algeria: 6 (Moderate-High Risk) - Positive
Egypt: 6 (Moderate-High Risk) - Negative
Jordan: 5 (Moderate Risk) - Negative
Kuwait: 3 (Moderate-Low Risk) - Stable
Morocco: 5 (Moderate Risk) - Positive
Saudi Arabia: 3 (Moderate-Low Risk) - Negative
Tunisia: 5 (Moderate Risk) - Negative
United Arab Emirates: 3 (Moderate-Low Risk) - Positive
* The STAR rating runs on a scale from 1 to 10, where 1 represents the lowest risk and 10 the highest risk.
The 10 rating steps are aggregated into five broad categories to facilitate their interpretation in terms of credit quality. Starting from the most benign part of the quality spectrum, these categories range from ‘Low Risk’, ‘Moderate-Low Risk’, ‘Moderate Risk’, ‘Moderate-High Risk’ to ‘High Risk’, with a separate grade reserved for ‘Very High Risk.’
In addition to the 10-point scale, rating modifiers are associated with each scale step: ‘Positive’, ‘Stable’, and ‘Negative’. These rating modifiers allow further granularity and differentiate more finely between countries in terms of risk.
For further information about the Atradius STAR rating, please click here.
Head of state: President Sheikh Khalifa bin Zayed Al Nahyan (since November 2004), Emir of Abu Dhabi
Head of government: Vice President and Prime Minister Mohammed bin Rashid Al Maktoum (since December 2006), Emir of Dubai
Government type: Federation of seven Emirates: Abu Dhabi, Ajman, Al Fujayrah, Dubai, Ra‘s al-Khaymah, Umm al-Qaywayn, and Sharjah Specified powers are delegated to the UAE federal government (foreign affairs, defence, currency, infrastructure, and healthcare), while other powers are reserved to member Emirates (especially economics).
Form of government: The Federal Supreme Council (FSC), composed of the seven Emirate rulers, is the highest constitutional authority in the UAE. The President and Vice President are elected from among the seven FSC members by the FSC for five-year terms. The FSC determines general policies and sanctions federal legislation. Both the Abu Dhabi and Dubai Emirs have an effective veto.
Population: 9.4 million (est.) - immigrants make up more than 80% of the total population
The internal political situation remains stable
Domestic politics are influenced considerably by the ruling families and traditional tribal structures. Political parties or trade unions are not permitted and opposition is virtually non-existent. The Federal National Council (FNC) as a legislative body has only an advisory role. However, political liberalisation has seen some limited progress, at least when compared to other states in the region.
A foreign policy that supports the UAE’s commercial interests
The UAE has a major interest in regional stability to encourage and ensure continued trade, foreign direct investment inflow and tourism. To achieve this objective, it pursues a balanced foreign policy. Political and economic relations with the US and Europe are close and the UAE supports a regional US military presence, as Washington is perceived to be the ultimate security guarantor.
The UAE is part of the alliance against the Islamic State (IS), and as such it has launched air strikes against IS in Syria and Libya. This engagement has principally increased the risk of terrorist attacks in the UAE. However, the security forces are considered competent and effective. A wave of arrests and convictions of Islamic activists over the past years is said to have reduced the influence of parties such as the Muslim Brotherhood. Overall, there is no indication of large scale concerns about security.
Lower oil price takes its toll on growth
The economy of the UAE is the second largest in the Arab world (after Saudi Arabia). It has been successfully diversified, with 71% of UAE‘s total GDP coming from non-oil sectors. While Abu Dhabi’s economy is still highly dependent on oil, Dubai is an important regional hub for trade and services (oil accounts for only 5% of Dubai’s GDP).
Despite the overall diversification, the lower oil price is expected to take its toll on economic growth, not only through lower oil export revenues, but also due to the fact that the lower oil price will affect Dubai as service provider (tourism, trade and investments) for other oil-exporting countries in the region. After increasing 4.6% in 2014, it is expected that GDP growth will slow to 3.2% in 2015.
That said, government spending on infrastructure should support growth, mainly in Abu Dhabi and Dubai. In Abu Dhabi, the government is expected to continue to invest in oil, gas and aluminium industries. The rebound of Dubai ́s property market after the severe crisis in 2009 also boosted economic activity. Concerns of a renewed bubble in the property market have eased, as in recent months real estate prices have decreased again after the government has taken steps to cool the market (e.g. by capping loan amounts). Major projects related to World Expo 2020 in Dubai should support economic growth in the coming years. Dubai ́s economy, which accounts for 30% of the UAE’s economy, is expected to grow about 5% in 2015. In view of the on-going political turmoil in the Middle East, the UAE ́s appeal as a safe and stable destination helps to underpin its attractiveness to investors.
Dubai in particular has close business ties with Iran, although this comes with some political tensions. As a result, Dubai will benefit from a lifting of sanctions against Teheran as a final nuclear deal between Teheran and the five permanent members of the UN Security Council plus Germany has been reached at last.
Increased public spending can be easily financed due to substantial assets
The UAE ́s fiscal balance will likely become a deficit in 2015 and 2016 due to increased government spending and lower oil revenues. The fiscal break-even oil price to meet spending commitments should rise to USD 78 per barrel in 2015. But given its ample foreign currency assets (reserves and sovereign wealth funds) the UAE is able to easily finance the increased spending. The UAE in general, and Abu Dhabi in particular, have extensive sovereign wealth funds (SWFs), established to secure and maintain the future welfare of the country. All SWFs are estimated to be worth USD 970 billion. With assets estimated at USD 650 billion, UAE‘s Abu Dhabi Investment Authority (ADIA) is the second-largest SWF in the world, investing in a wide range of assets, from equities and fixed income securities to infrastructure. It also plays a leading role in the development and governance of industries.
Given the size of the SWFs and the relatively modest amount of foreign debt (USD 175 billion in 2015), the UAE’s solvency position is considered to be strong. However, Dubai ́s government and government-related entities are still highly leveraged. With a debt level of USD 135 billion (132% of GDP), there are still concerns that Dubai could face financing difficulties. However, through a combination of refinancing, sale of assets and repayments, this should be manageable – as long as investor sentiment does not significantly deteriorate in the future.
The UAE ́s financial sector is well capitalised and profitable. The industry has profited from the unrest in other countries in the region, as private capital flows have increased sharply since 2011. The monetary indicators are stable: since 1980, the dirham has been pegged to the USD, and this is set to continue. Asset quality has improved after the Central Bank issued new rules to curb the kind of irresponsible lending seen before 2009 and state-linked companies must apply for sovereign guarantees to ensure government support for their debts.