Emerging

Towards a new crisis in Dubai?

EcoEmerging// 2nd quarter 2020  
21  
economic-research.bnpparibas.com  
United Arab Emirates  
Towards a new crisis in Dubai?  
As the most diversified economy of the Gulf countries and a major oil producer, the United Arab Emirates faces a double shock: the  
economic fallout of the COVID-19 pandemic and plummeting oil prices. The current situation risks accelerating the real estate  
market crisis in Dubai, which has been developing for several years, eroding the financial health of companies in the construction  
and services sectors. As credit risk rises, it will place a negative strain on banks. Although public finances seem healthy enough to  
handle the decline in oil revenues, public debt is bound to rise. The UAE’s solid external position guarantees the dirham’s peg to  
the US dollar.  
An economy hit on two fronts  
1- Forecasts  
Like all of the economies of the Gulf countries, the United Arab  
Emirates (UAE) is currently being hit by a double shock: the fallout  
of the COVID-19 pandemic and the drop in oil prices. The structure  
of the UAE economy makes it particularly sensitive: Abu Dhabi is a  
major OPEC oil producer, and Dubai is especially dependent on  
tourism and the real estate sector. To slow the pandemic’s spread,  
a number of restrictions were imposed on non-essential travel and  
economic activity.  
2018 2019e 2020e 2021e  
Real GDP growth (%)  
1.7  
3.1  
1.9  
-1.9  
0.4  
-6.7  
0.2  
3.8  
1.8  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Currentaccountbalance / GDP (%)  
1.8  
-8.3  
-0.4  
-6.9  
1.0  
1.0  
7.3  
e: BNP Paribas Group Economic Research estimates and forecasts  
For the moment, fiscal stimulus measures have been rather  
moderate at about 2% of GDP. They are comprised essentially of  
tax cuts, higher subsidies for water and electricity, and the  
strengthening of Ghadan 21, Abu Dhabi’s small business  
2- PMI index non-oil private sector, new orders  
7
0
5
6
1
development programme . The central bank of the UAE (CBUAE)  
has cut its key rate by 125 basis points (bp) since the beginning of  
the year and announced a USD 70 bn support package (17% of  
60  
2
5
5
0
GDP) comprised of zero-interest rate collateralized loans to banks;  
postponed loan repayments for certain companies; the reduction in  
reserve requirements for demand deposits, the easing of prudential  
standards for SME loans; and lifting the ceiling on bank exposure to  
the real estate sector. Certain companies in the hardest hit sectors,  
such as the airlines, will also benefit from capital injections from the  
government.  
5
45  
4
0
5
3
2018  
2019  
2020  
Source: Markit  
Non-oil activity plummets  
In Abu Dhabi, difficulties in the real estate sector also weigh on non-  
oil GDP growth (less than 1% since 2018). For the UAE as a whole,  
we estimate that non-oil GDP could contract by 5% in 2020 (from an  
estimated +1.1% in 2019).  
Growth has slumped in the UAE’s non-oil sector since 2017, to less  
than 2%, due to the slowdown in activity in Dubai. Over the past  
three years, the Federation’s most diversified economy (about 30%  
of total GDP), Dubai, has experienced a sharp slowdown in the real  
estate sector (15% of GDP) and a decline in the number of tourists  
Oil-sector GDP, which accounts for about 30% of the UAE’s total  
GDP, is expected to report significant decline in 2020. The OPEC+  
group (binding OPEC and Russia together in terms of production  
quotas) agreed to reduce oil production by 9.7 m b/d from May 2020.  
(
tourism accounts for at least 10% of GDP). What has been a  
structural slowdown so far is likely to become a contraction this year  
with the slowdown in construction projects, the temporary halting of  
tourist visits and the decline in global trade. An aggravating factor is  
the possible postponement by a year of World Expo 2020, initially  
planned for October, which would dash any hopes of a recovery in  
the second half of the year.  
rd  
The UAE is the 3 largest OPEC producer (11% of the total; 3.09 m  
b/d on average in 2019), and should cut oil production by 0.74 m b/d.  
Total oil production should decrease by about 10% on average in  
2
020.  
Credit risk is expected to rise  
1
All in all, we expect activity to contract by 6.7% in the UAE in 2020.  
Considering the drop in non-oil activity, which primarily affects Dubai,  
the UAE economy will mainly be hit by a significant rise in credit risk.  
For several years, government-related entities participating in the  
development of Dubai have been hit by the slowdown in the real  
This AED 50 bn programme (3.4% of GDP) was launched in 2019 to support  
the development of small and mid-sized enterprises (SME), notably in new  
technologies.  
2
The key rate cut (on 1-week CDs) was not really an economic support  
measure but reflects efforts by the CBUAE to keep pace with Fed decisions  
given the dirham’s peg.  
EcoEmerging// 2nd quarter 2020  
22  
economic-research.bnpparibas.com  
3
estate sector. These heavily-indebted companies , which are  
mainly active in construction and real estate, will rapidly encounter  
liquidity problems.  
3- Commercial banks balance sheet: main tems  
Deposits  
Claims on Public sector  
Claims on private sector  
NFA (RHS)  
Y/Y, %  
USD bn  
Although residential property prices have fallen by about 30% since  
3
0
5
30  
2
018, lower prices have not slowed the growth in supply in a market  
that was already suffering from surplus capacity. According to S&P,  
019 was a record year for Dubai for the delivery of residential  
2
2
1
0
0
2
20  
15  
0
property, and this record could be broken again in 2020. The  
possible cancellation of World Expo 2020 in Dubai will only  
accelerate the decline in demand and the drop in prices. Certain  
conglomerates have already approached their main creditors to try  
to renegotiate their debt, while others have seen their ratings  
downgraded by the rating agencies. Dubai’s capacity to support  
ailing entities is constrained by limited fiscal resources. Issuance of  
costly external debt or support from Abu Dhabi could be needed to  
support those entities.  
1
0
5
0
-
-
10  
20  
Title: Commercial banks balancesheet: main items, y/y %  
-5  
-30  
2015  
2016  
2017  
2018  
2019  
Source: IMF  
The banking sector is first in line  
oil production and the average 40% decline in oil prices during the  
year will significantly impact oil revenues. To offset partially the  
decline in fiscal revenues, the government could draw on the  
revenues of its sovereign funds. All in all, we expect a fiscal deficit  
equivalent to 8.3% of GDP in 2020 (USD 35 bn) and 6.9% of GDP  
in 2021.  
In the midst of an economic slowdown and a possible acceleration  
of the real estate sector’s troubles, the quality of bank assets is  
likely to deteriorate. The doubtful loan ratio as a share of total loans  
has deteriorated regularly since 2017. According to the IMF, it rose  
to 6.5% at year-end 2019. The exposure of UAE banks as a whole  
to the construction and real estate sectors is equivalent to about a  
quarter of private-sector lending.  
The government has several options for financing the deficit. An  
international bond issue in 2019 (USD 10 bn) provided liquidity, and  
a USD 7 bn Eurobond was issued in April 2020. Lastly, the  
government has more than USD 800 bn (200% of GDP in 2019) in  
various sovereign funds, which could be a source of additional  
financing. Government debt is low, and could reach 28% of GDP in  
Since the bursting of the 2008 housing bubble, banks have  
strengthened their balance sheets, conglomerates have  
rescheduled their debt and real estate market speculation has  
slowed. For the financial sector, and thus for the economy as a  
whole, the real estate sector is no longer seen as a systemic risk.  
Yet the CBUAE recently took measures to relax prudential  
standards for banks, notably for SMEs. Another source of risk is the  
shutdown of businesses in many economic sectors and its impact  
on employment. Bank lending to the retail sector is equivalent to  
2
020.  
A solid peg  
External accounts are solid and the economy generates recurrent  
current account surpluses. Given the decline in oil prices and the  
contraction in world trade, the current account should show a deficit  
of 0.4% of GDP in 2020 (USD 1.8 bn). According to the IIF (Institute  
of International Finance), external debt amortisation (loans and  
bonds) will amount to USD 60 bn in 2020. The central bank had  
foreign reserves of USD 107 bn in 2019 (7.5 months of imports of  
goods and services). In this environment, and after taking into  
account the government’s external assets, the dirham’s peg to the  
US dollar is not at risk.  
1
2
1% of private-sector lending while consumer loans account for  
5%.  
On the resource front, the erosion of public finances could strain  
government deposits with banks. They accounted for 18% of total  
deposits at year-end 2019. Yet in the short term, Emirate banks are  
unlikely to face liquidity problems. Deposits, which are banks’ main  
funding source, increased at an annual rate of 7% in December  
2019, while private-sector lending (67% of total lending) stagnated  
(
+0.7%). Signalling an absence of liquidity pressures, banks  
reported a net external surplus of USD 24 bn (5.9% of GDP) in  
December 2019, the highest level in 15 years.  
Solid public finances  
With the drop in oil revenues (about 50% of total revenues) and the  
implementation of fiscal stimulus measures, the UAE is expected to  
report a significant fiscal deficit in 2020. The expected decrease in  
3
Total debt of the Dubai government and government-related entities which  
depend on it exceeds 100% of Dubai’s GDP.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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