eco TV Week

United Arab Emirates: Positive economic prospects

3/1/2019

Economic recovery is underway despite the weak activity in tourism and real estate sectors. Economic prospects are positive and risks are under control.

Pascal DEVAUX

TRANSCRIPT // United Arab Emirates: Positive economic prospects : March 2019

Economic growth reached around 3% in real terms in 2018. This level contrasts with the small 0.8% recorded in 2017. This acceleration in activity is mainly due to the increase in oil production.

Concerning non-oil activity, the growth remained below 3%. It is far better that the other GCC economies, but it remains largely below historical levels. Until 2016, non-oil GDP growth averaged more than 5%.

Tourism and construction/real estate are the main drivers of non-hydrocarbon activity in the Emirates. They currently face mixed prospects, notably in Dubai. The tourist frequentation is not increasing anymore. For example, the passenger traffic in Dubai grew by a small 1% in 2018.

The regional environment is not favorable to the tourism activity, from both the political and the economic point of view. The sectors of construction and real estate are not doing well. Given oversupply on this market, sales and prices have been declining since 2016.

We do not think that the economic model of the UAE is in difficulty. It is based on vast hydrocarbon resources in Abu Dhabi, and on a diversified economy in Dubai, which is based on services. From the economic point of view, the impact of the recent low oil price period has been weak. Fiscal deficit has remained limited. We think that the UAE are entering in a new regime of growth, which is more moderate and less volatile. In this new normal, the influence of Abu Dhabi, which has traditionally a more prudent economic policy than in Dubai, will be increasing.

Economic prospects are positive in the short term. The governments of Abu Dhabi and Dubai will have supportive fiscal policy, notably thanks to investment. The World Expo 2020 should boost the whole economy of Dubai. In AD the massive investment plan of the national oil company (ADNOC) is expected to strongly support the hydrocarbon sector. This program targets to invest USD132bn during the next five years.

More generally, the reforms underway should continue to improve the attractiveness of the UAE for foreign investors. For example, it is the regional leader in the fintech sector. Nevertheless, the main sources of risk are the oil price and the GRE financial situation, which relies on the real estate sector, especially in Dubai. However, the risk linked to the conglomerates is currently under control.

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