Emerging

UAE: Positive economic prospects

EcoEmerging// 2nd quarter 2018  
19  
economic-research.bnpparibas.com  
United Arab Emirates  
Positive economic prospects  
In a less buoyant regional environment and at a time of fiscal consolidation, economic growth has remained positive even though it  
slowed in 2017. Thanks to a mild upturn in oil prices and fiscal stimulus in 2018, the economy should gradually return to more  
robust growth, despite some persistent geopolitical and economic uncertainties. The country’s fiscal position is still precarious, but  
the government’s solvency is solid. In the medium term, the public sector’s external debt should continue to swell. The Emirates  
benefit from favourable financing conditions, which will facilitate ongoing efforts to diversify the economy.  
Dubai is still the main economic growth engine  
1-Forecasts  
2
016 2017 2018f 2019f  
In 2017, the United Arab Emirates (UAE) reported the lowest  
economic growth rate since the 2009 crisis. Real GDP rose by only  
Real GDP growth (%)  
3.0  
1.1  
3.0  
3.7  
1
.1%, undermined by the decline in oil GDP (-1%), reflecting OPEC  
Inflation (CPI, year av erage, %)  
Gen. Gov . balance / GDP (%)  
Gen. Gov . debt / GDP (%)  
1.8  
2.1  
2.8  
1.0  
2.5  
0.0  
restrictions on oil production, and sluggish non-oil activity (70% of  
total GDP). Non-oil GDP rose by only 2% in 2017, compared to an  
average of 4.6% in 2012-2016. This was the lowest growth rate  
among the countries of the Gulf Cooperation Council (GCC),  
excluding Saudi Arabia. The UAE’s underperformance can be  
attributed to the negative impact of Abu Dhabi’s fiscal consolidation  
-4.3  
-1.7  
21  
21  
19  
18  
Current account balance / GDP (%)  
Ex ternal debt / GDP (%)  
3.8  
7.4 13.1  
9.7  
65  
85  
69  
95  
3.4  
66  
65  
Forex reserv es (USD bn)  
100  
105  
(57% of total GDP) while Dubai’s economic growth was sapped by a  
Forex reserv es, in months of imports  
Ex change rate USDAED (y ear end)  
3.2  
3.5  
3.5  
depressed oil environment and regional political tensions.  
Dominated by services and very open internationally, Dubai’s  
economy is particularly sensitive to fluctuations in the regional  
political situation.  
3.67 3.67 3.67  
3.67  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Real GDP growth (%)  
In Abu Dhabi, the introduction of new taxes on expatriates and on  
several consumer goods had a negative impact on private  
consumption. In Dubai, the tourism industry experienced another  
bad year, even though the situation has improved compared to 2016.  
Hotel turnover declined 3.5%, after plunging 10% in 2016, and hotel  
occupancy rates increased slightly, by 0.5%. In 2017, the airport  
activity reported the weakest growth ever (+5.5%). Tourists from the  
GCC countries (20% of the total) dropped off sharply, with a 6%  
decline in the number of Saudi tourists (the second biggest source  
of tourists after India). In general, the economic impact of the Qatar  
embargo was limited (trade with Qatar accounts for less than 1% of  
UAE foreign trade), although it had a non-negligible impact on  
business in Dubai’s services sector. Consumer spending by Qatari  
Hydrocarbons  Non-hydrocarbons  Total  
15  
10  
5
0
-5  
th  
-10  
tourists (the 4 biggest contributor in 2016) dropped by 42%. In the  
construction sector, business was still going strong, even though  
house prices continued to decline in 2017.  
05  
06 07 08 09 10 11 12 13 14 15 16e 17e 18e 19e  
Sources: Department of Economic Statistics, BNP Paribas  
Growth is expected to accelerate moderately in 2018  
expected to be more accommodating, which should have a  
favourable impact on tourism and real estate. Dubai also has  
another growth engine: ongoing investment in preparation for the  
The economic rebound forecast for 2018 should remain moderate.  
Considering that OPEC’s 2017 production agreement was renewed  
by member countries, oil GDP is expected to remain flat. Non-oil  
activity should get a boost as Abu Dhabi relaxes its fiscal  
consolidation efforts and Dubai’s economy enjoys a more growth-  
supportive environment. VAT was introduced in January 2018, but  
at a reduced rate of 5% and with numerous exemptions.  
2020 World Expo. About USD 7 bn (5.7% of Dubai’s GDP) has been  
allocated to this event.  
Yet short-term economic indicators are still mixed. PMI has declined  
since November 2017, although it is still comfortably in positive  
territory (54.8 in March 2018). Bank lending to the private sector  
continued to increase at a sluggish pace. Lending to quasi-public  
entities declined, at an annualised rate of -9.7% in February 2018,  
The oil cycle is expected to improve (with a 19% increase in the  
average crude oil price this year) and the region’s fiscal policy is  
The bank  
for a changing  
world  
EcoEmerging// 2nd quarter 2018  
20  
economic-research.bnpparibas.com  
while growth in private sector lending was barely positive at 1.4%.  
The current upturn in US interest rates risks limiting any attempts at  
a rebound in lending. The dirham’s peg to the dollar means that the  
UAE central bank must follow US monetary policy. The 3-month  
interbank rate has increased by more than 90 basis points (bp)  
since October, to 2.46%.  
3
- Financing conditions  
5-year CDS spreads, Abu Dhabi (basis points, lhs)  
3-month EIBOR (%)  
140  
120  
100  
2,5  
2
The economic recovery in 2018 is still vulnerable to several factors:  
oil price trends, Saudi Arabia’s economic recovery, the risk of  
depreciation of the rouble (Russia was the 4th biggest foreign  
contributor to consumption in Dubai in 2017), and the evolution of  
1
1
0
0
,5  
80  
th  
sanctions on Iran (the UAE’s 5 largest trading partner).  
60  
40  
Fiscal expenditure remains under control  
,5  
20  
In 2017, the UAE reported a fiscal deficit for the third consecutive  
year (1.7% of GDP). With the expected upturn in oil-related fiscal  
revenues in 2018, the government should be able to generate a  
small surplus (estimated at 1% of GDP). The government’s financial  
position is still very comfortable. Government debt is estimated at  
0
2015  
2016  
2017  
2018  
Sources: Thomson Reuters, CBUAE  
21% of GDP in 2017, while external assets are estimated at nearly  
two times GDP.  
Fiscal consolidation efforts are expected to continue, notably in Abu  
Dhabi (about 70% of the UAE’s consolidated budget), albeit at a  
slower pace than in previous years. The government intends to  
increase spending on education and healthcare. Tax increases  
should be more moderate this year, but efforts to streamline the  
public sector will continue. In 2017, the government launched major  
mergers in the banking sector and between sovereign funds. Dubai  
has clearly adopted a more expansive budget. It intends to increase  
total expenditure by 20%, with a 47% increase in infrastructure  
spending, notably in preparation for Expo 2020.  
Faced with higher domestic interest rates and favourable financing  
conditions in international markets, public-sector external debt  
should continue to rise in the medium term. The Abu Dhabi  
government made two Eurobond issues in 2016 and 2017  
(USD 10 bn), while some state-owned companies (ADCOP and  
Investment Corporation of Dubai) issued sizeable foreign debt  
amounts. Financing needs will remain high given the fragile fiscal  
position and ambitious investment projects. The Abu Dhabi National  
Oil Company (ADNOC) plans to spend USD 109 bn on refining,  
petrochemicals and natural gas exploration over the next five years.  
Despite fiscal consolidation efforts engaged since 2015, public  
finances will continue to be highly vulnerable to oil price fluctuations  
in the medium term. A large part of current expenditure is hard to  
curb, and the impulse of economic activity is still largely dependent  
on the state. So far, the introduction of new taxes has only  
generated a small increase in non-oil tax revenues compared to  
fiscal revenues as a whole. The introduction of VAT in January 2018  
is likely to yield the equivalent of 1.5% of GDP. In the medium term,  
given the mixed outlook for oil prices and the upward pressure on  
public spending, the fiscal balance should be slightly positive at best.  
The UAE’s medium-term growth prospects are positive, thanks  
notably to the complementary nature of the different Emirate  
economies. Abu Dhabi continues to develop its downstream oil  
sector, which will enhance the value of its hydrocarbon resources. In  
Dubai, tourism is still a core business, but other sectors are also  
showing encouraging prospects. Dubai is increasingly positioning  
itself as a regional hub for the high-tech sector.  
Pascal Devaux  
pascal.devaux@bnpparibas.com  
Public debt is high but sustainable  
General government debt is moderate but total public-sector debt is  
large. This is mainly due to the period of excessive debt run up by  
Dubai conglomerates over the previous decade. According to IMF  
estimates, Dubai’s public debt (including entities in which the  
government’s stake exceeds 50%) was equivalent to 111% of GDP  
(25% of GDP in Abu Dhabi). In 2018, debt repayment obligations  
will be high in Dubai (equivalent to 26% of Dubai GDP), but it will be  
rolled over.  
The bank  
for a changing  
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