Emerging

In search of a second wind

rd  
24  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
United Arab Emirates  
In search of a second wind  
Economic growth has slowed for the past three years. OPEC+’s restrictive policy is curbing oil production. Non-oil GDP has been  
hit by sluggish tourist traffic, which has eroded domestic demand, notably in Dubai. In the short term, in the midst of a slowdown in  
world trade, the only factor that is boosting growth is the current preparations for Expo 2020. In this environment, consumer price  
inflation is negative, pulled down by the persistent slump in house prices. Fiscal policy remains cautious and offers little support  
for growth.  
The feeble rebound in real GDP growth in 2018 (+1.7% compared  
1
- Forecasts  
to +0.5% in 2017) confirmed the sluggishness of the UAE economy.  
All of the components of domestic demand declined, both  
consumption and investment. This meagre GDP growth was due  
solely to a decline in imports and a slight upturn in exports at a time  
when hydrocarbon production was on the rise. In 2019, with OPEC+  
renewing its restrictive policy 1 and with the non-oil economy  
2017 2018 2019e 2020e  
Real GDP growth (%)  
0.5  
1.7  
2.4  
3.2  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
2.0  
1.7  
3.1  
1.8  
-1.8  
0.2  
1.0  
0.9  
-
20  
17  
17  
16  
showing no signs of a recovery, prospects are still looking morose.  
Current account balance / GDP (%)  
External debt / GDP (%)  
7.0 12.0 11.0  
11.0  
Oil GDP growth faces headwinds  
67  
95  
64  
66  
66  
In the midst of the slowdown in global economic growth, and given  
the dynamic momentum of US oil production, OPEC policy is likely  
to remain restrictive in the quarters ahead. In early July, the group of  
OPEC+ countries decided to renew the production levels adopted at  
year-end 2018. As a result, UAE oil production is expected to  
remain unchanged in 2019 at about 3.05 million barrels a day  
Forex reserves (USD bn)  
100  
105  
107  
Forex reserves, in months of imports  
Exchange rate USDAED (year end)  
6.8  
6.6  
6.5  
6.5  
3.67 3.67 3.67  
3.67  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Slow economic growth  
(
mb/d). On average, this represents a 2.4% increase in production  
compared to 2018.  
y/y % change  
In 2020, our central scenario calls for the stability of oil GDP in the  
UAE (equivalent to about 30% of total GDP). World oil supply will  
continue to be influenced by US production, which is unlikely to  
encourage the OPEC+ countries to ease significantly their restrictive  
policy. Looking beyond factors pertaining to the oil market, the main  
risk to oil GDP is geopolitical. Rising tensions in the Strait of Hormuz  
since the beginning of the year have led to low-intensity attacks on  
maritime shipping routes. These incidents highlight the vulnerability  
of the Emirate’s oil outlets. Production is essentially located in Abu  
Dhabi (96% of total production) and is shipped via the Strait of  
Hormuz. In case of a blockade, the pipeline between Abu Dhabi and  
the port of Fujairah can transport 50% of production. These two  
alternatives for transporting oil products were hit by attacks that  
caused minor damage. Although a complete blockade of transport  
channels is unlikely, the risk of a temporary rupture has increased.  
 Hydrocarbon GDP  Non-hydrocarbon GDP  Construction GDP  
Total GDP  
8
6
4
2
0
-2  
-4  
2012  
2013  
2014  
2015  
2016  
2017  
2018e  
Source: Federal Competitiveness and Statistics Authority, BNP Paribas  
In the medium term, assuming OPEC’s policy eventually changes,  
the national oil company ADNOC has ambitious targets: to boost  
daily production to 5 mb/d by 2030, develop the petrochemical  
industry, and increase natural gas production in order to achieve  
self-sufficiency.  
 Mixed outlook for the non-oil sector  
Growth in the non-oil sector was unusually weak in 2018 at 1.3%,  
the lowest growth rate since the 2009 crisis. The slowdown can be  
attributed to several factors, notably the lacklustre regional  
environment, the introduction of VAT on consumption, the negative  
indirect effects of the Qatar embargo and the dollar’s appreciation,  
1
OPEC+ is mainly comprised of OPEC members + Russia.  
rd  
25  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
which might have had an unfavourable impact on tourism. Short-  
term prospects are still uncertain, and economic signals are  
contradictory.  
3
- Broad decline in consumer prices  
%, average annual rate  
CPI Food Transport ▪▪▪ Housing, water, fuel  
1
In June 2019 the PMI index reached 57.7, confirming its rebound  
since end-2018. This was the exception, however, and the other  
economic indicators are all trending downwards, notably in Dubai,  
which is by far the Federation’s most diversified economy.  
Passenger traffic at the Dubai airport has slowed continuously since  
2
0
8
6
4
2
0
1
2
016. In Q1 2019, full-year growth was virtually nil (+0.2%). The  
sharp slowdown in the tourism sector confirms the trend observed  
since 2016. We can also see a significant decline in spending by  
tourists. According to the central bank, revenue per overnight stay  
declined by 7.6% in 2018, resulting in feeble retail sales growth.  
This is the Emirate’s biggest economic sector (12%) after the  
extractive industries (30%). Growth was the slowest in the past two  
years (0.1% and 0.5%, respectively).  
-2  
-4  
-6  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: Federal Competitiveness and Statistics Authority, BNP Paribas  
Activity in the construction sector is still trending upwards, notably  
as projects are completed for the World Expo 2020. This is likely to  
be the main growth engine in 2019. Construction sector lending  
remains the most dynamic segment of bank lending to the private  
sector (+8% y/y in March 2019). Excluding projects pertaining to  
Expo 2020, however, the property sector has been hit by ongoing  
price declines since 2016, due to a chronic over supply.  
The housing and energy component, which accounts for a third of  
the composition of the consumer price index, declined 4.5% y/y in  
April 2019. Similarly, transport and food prices have been trending  
downwards since the beginning of the year. The decline in housing  
prices should continue to negatively weigh on the overall index at  
least through the end of the year.  
At the same time, external factors are likely to place a negative  
strain on activity in the short term. The Emirates are a major  
logistical base for regional trade (essentially with Asia and the  
Middle East). Re-export activities account for about 60% of total  
non-oil exports. Even though the US-China trade war will not have a  
direct impact on UAE growth, the decline in world trade will reduce  
the Emirate’s logistics activities. In volume terms, world trade rose  
at an average monthly rate of only 0.5% in Q1 2019, compared to  
It is hard to determine whether the Emirate’s sluggish economic  
activity is due more to structural factors (decline in attractiveness for  
tourists and investors) or to cyclical ones (economic slowdown in  
the Gulf region, geopolitical tensions). Growth seems to be in the  
process of normalising, notably in Dubai. The current situation could  
strain the quality of bank assets, due notably to their exposure to the  
construction and housing sectors (25% of private sector loans).  
Moreover, if growth continues to slow over the long term it could  
strain the performance of government-related entities, which are  
very active in the sector and heavily leveraged.  
3.6% in Q1 2018. Rising political tensions in the region is another  
factor that will continue to strain growth. The Dubai economy is  
dependent on the services sector and foreign investment, notably in  
the property market, which makes it especially vulnerable to the  
deterioration in the regional political environment.  
Nonetheless, the UAE economy continues to benefit from solid  
fundamentals, both in terms of public finances and external  
accounts. Recent consolidation movements at various levels  
Economic policy provides little support  
(
banking, sovereign funds) and a cautious economic policy have  
In the midst of a morose economy, economic policy measures are  
unlikely to be significant support factors. The 2019 budget is  
expected to support growth, but without triggering a major recovery  
in public expenditures. The main government measures target  
improvements in the business environment, notably for foreign  
investment. In terms of monetary policy, the growth of bank lending  
could get a boost from the decline in central bank rates. With the  
dirham pegged to the US dollar, the slight decline expected in US  
rates in 2019 should reduce the cost of financing.  
bolstered the country’s medium-term prospects.  
Deflationary environment  
Feeble activity in the non-oil sectors and a depressed property  
market have created deflationary pressures. Inflation was still  
positive at 3% in 2018, mainly due to the introduction of VAT at the  
beginning of the year. In 2019, we are looking for a decline in overall  
consumer price inflation to an average annual rate of about 1.8%.  
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