MENA Country Report UAE 2018

Country report

  • United Arab Emirates
  • Agriculture,
  • Automotive/Transport,

24th July 2018

Economic growth is expected to accelerate in 2018 and 2019, due to higher oil prices, stronger external demand and the easing of fiscal consolidation.

 

UAE 2018 - Key indicators

 

 

 

UAE 2018 - Industries performance outlook

 

Political situation

The internal political situation remains stable

The ruling families and traditional tribal structures influence domestic politics considerably. 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.

The UAE will maintain an assertive foreign policy in order to increase its regional influence in light of continued insecurity in the Middle East. The country is part of the alliance against the Islamic State (IS), and as such it has launched air strikes against IS in Syria and Libya. At the same time, its armed forces are part of the campaign against Houthi rebels in Yemen, co-led with Saudi Arabia.

The UAE was also one of the initiators (together with Saudi Arabia) to impose sanctions on Qatar, for suspecting the country of sponsoring terrorism. Diplomatic ties and transport links have been cut, and Qatari nationals have been asked to leave the UAE.  

Economic situation

Higher growth in 2018 and 2019

UAE 2018 - Real GDP growth

After a subdued performance in 2017 economic growth is expected to accelerate to 3.0% in 2018 and 3.8% in 2019, supported by higher oil prices, stronger external demand and the easing of fiscal consolidation. Increased infrastructure spending in the run-up to the World Expo 2020 event hosted in Dubai will also stimulate economic activity. Inflation is expected to temporarily increase to about 4.5% in 2018 as a result of the 5% VAT introduction in January 2018, while house prices continue to decrease due to strong supply growth and still modest domestic demand conditions.

Government revenues will increase amid higher oil prices and the implementation of several non-oil revenue raising measures (excise duties, VAT introduction). However, fiscal consolidation will be relaxed somewhat, with more attention given to welfare spending (in order to stem any discontent after previous subsidy cuts) and to accelerate economic diversification.

UAE 2018 - Real private consumption

At the same time heavy capital spending will continue, particularly by Dubai in the run-up to the 2020 World Expo. Therefore, the fiscal deficit will decrease only marginally in 2018 and 2019. The UAE can afford this more gradual fiscal adjustment as long as the actual oil price is above its fiscal break-even oil price of around USD 62 per barrel.

In 2018 and 2019 the current account surpluses will be lower than before the oil slump (around 4-5% of GDP compared to 13.5% of GDP in 2014), despite the oil price rebound and stronger external demand. Maintaining the currency peg of the dirham to a stronger USD hampers competitiveness of non-oil sectors and diversification efforts. However, there is little risk of the dirham being de-pegged, as large foreign currency assets provide strong support.

UAE 2018 - Fiscal balance

The banking sector is well capitalized with a capital-adequacy ratio of 18.6% at the end of 2017, while the liquidity squeeze during the recent oil price slump has ended and government liquidity has rebounded beyond pre-crisis levels. However, private credit growth remains subdued at about 1% year-on-year due to several interest rate increases, as the Central Bank is tracking US Federal Reserve interest rate hikes.

Despite progress made in debt restructuring on some government related entities, a high gross external debt level of USD 240 billion (62% of GDP) remains from the property market crisis in 2008/2009. Additionally, the lower current account surpluses have increased financing requirements.

UAE 2018 - Current account

That said, the UAE should be able to meet its repayment schemes that will peak in 2018 and 2019. A successful USD 10 billion bond issue of Abu Dhabi (that included a 30-year bond) at the end of last year underlines that capital market access is good, and a law that allows bond issuance on a federal level is in the pipeline (a right that is currently reserved for individual emirates only). In addition, the UAE can fall back on large Sovereign Wealth Funds that have an estimated total value of over USD 1.3 trillion (above 300% of GDP).

Currently non-oil sectors account for 70% of the UAE´s total GDP. The government´s strategy is to further diversify the economy away from oil in order to ultimately establish a knowledge-driven economy in the long-term. The aim is to increase the GDP share of non-oil sectors to 80% by 2021. There is still scope for further cementing the UAE’s role as a commercial hub, for example by relaxing constraints on foreign direct investment and easing access to finance for small and medium-sized enterprises.

Related Documents

Disclaimer

The statements made herein are provided solely for general informational purposes and should not be relied upon for any purpose. Please refer to the actual policy or the relevant product or services agreement for the governing terms. Nothing herein should be construed to create any right, obligation, advice or responsibility on the part of Atradius, including any obligation to conduct due diligence of buyers or on your behalf. If Atradius does conduct due diligence on any buyer it is for its own underwriting purposes and not for the benefit of the insured or any other person. Additionally, in no event shall Atradius and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental, or consequential damages arising out of the use of the statements made information herein.