Emerging

An uneven economic recovery

th  
Eco Emerging // 4 Quarter 2021  
economic-research.bnpparibas.com  
2
1
U.A.E.  
AN UNEVEN ECONOMIC RECOVERY  
The United Arab Emirates (UAE) was hit by a twin shock with the fall in oil prices in 2020 and the pandemic’s impact  
on the services sector. The 2020 recession was severe, and the recovery this year is expected to be mild. Despite the  
positive prospects of the World Expo, Dubai’s economic activity will continue to be restrained by structural difficul-  
ties in the real estate market and uncertainty in the tourism and logistics sectors, which are unlikely to return to  
normal before 2023. Against this backdrop, public finances and the external accounts remain very favourable thanks  
to the accumulation of years of surpluses, but credit risk is on the rise. Some government-related entities active in  
the real estate sector are experiencing difficulties, and government support will remain selective.  
A GRADUAL ECONOMIC RECOVERY  
FORECASTS  
Of the Gulf countries, the United Arab Emirates (UAE) was the economy  
hit hardest by the double shock of the fall in oil production and prices,  
2
019  
2020  
2021e  
2022e  
and the impact of the Covid-19 pandemic on the services sector.  
Real GDP contracted 6.1% in 2020 due to a decline of roughly 6% in  
hydrocarbon GDP (about 30% of total GDP) and non-hydrocarbon  
GDP. As OPEC’s third largest oil producer, the UAE accounts for 10%  
of the cartel’s total oil production. Under the restrictive policy of  
OPEC+ producers, oil production was cut back by 7.5%. The Covid-19  
pandemic had a massive impact on logistics (down 16%) and retailing  
Real GDP growth (%)  
3.4  
-1.9  
0.6  
17  
-6.1  
-2.0  
-5.5  
16  
2.0  
-0.1  
1.8  
17  
4.4  
0.9  
2.5  
18  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
8.9  
66  
5.8  
66  
6.8  
67  
7.6  
68  
(
down 13%), which account for 6% and 13% of GDP, respectively. In  
Forex reserves (USD bn)  
107  
40  
103  
46  
109  
46  
123  
50  
construction and real estate, which together account for 14% of GDP,  
activity contracted 9%. Most of the country’s non-hydrocarbon activity  
is concentrated in Dubai, which accounts for about 30% of UAE GDP.  
With the downturn in retailing (-12%), restaurant services (-33%) and  
logistics (-36%), Dubai’s GDP contracted 11%.  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
In 2021, GDP growth in the UAE is expected to reach 2.0%. This sluggish  
recovery is due in part to the decline in hydrocarbon GDP (-2.8%) for the  
second consecutive year. Oil production has picked up since June, but  
only gradually, and current production levels (2.8m b/d in September  
REAL GDP GROWTH (%)  
6
4
2
021) are still far from that of April 2020 (3.7m b/d). As to non-  
hydrocarbon activity, leading indicators are still mixed for H1 2021, and  
the situation will not change fundamentally with the opening of the  
Dubai World Expo in October. Despite one of the world’s most extensive  
vaccination campaigns, mobility indicators are still barely higher than  
pre-pandemic levels. In Q1 2021, Dubai’s GDP contracted 3.7% due to  
an ongoing decline in logistics (-32% y/y), and despite a mild rebound  
in retailing (+2.8% y/y). At 30 June 2021, passenger arrivals at the  
Dubai airport were down 70% year-on-year. Over the same period, the  
number of building completions was down 41%. Tourism picked up over  
the summer months and the opening of the Dubai World Expo over the  
next six months should add to this momentum.  
2
0
-2  
-
-
-
4
6
8
Hydrocarbon GDP  
Non-hydrocarbon GDP  
Total GDP  
2015  
2016  
2017  
2018  
2019  
2020  
The economic recovery is not expected to consolidate before 2022.  
Hydrocarbon GDP growth is estimated at about 7% thanks to the  
ongoing increase in oil production, but also the upward revision  
of the UAE’s production quota within OPEC. Although the UAE has  
major oil production capacity (4.2m b/d), it is worth being cautious  
about oil market trends since demand is uncertain, and non-Opec+ oil  
producers could increase their production. The expected increase in oil  
prices should benefit the non-hydrocarbon economy, notably the real  
estate sector. With the gradual decline in the pandemic’s restrictive  
grip on travel, non-hydrocarbon GDP should increase by 3.2%. All in  
all, GDP growth in the UAE is likely to reach 4.4%. Yet there are still  
major downside risks. If the pandemic persists, it could have a negative  
impact on global oil demand and tourist traffic. The logistics sector  
activity is expected to be constrained for several more quarters due to  
the disruptions in world trade. As a result, business is not expected to  
return to normal before 2023.  
SOURCE: FEDERAL COMPETITIVENESS AND  
STATISTICS CENTRE, BNP PARIBAS  
CHART 1  
In the medium term, the hydrocarbon sector should benefit from the  
investment plan announced by the national oil company ADNOC, which  
plans to invest massively over the next five years (a total of USD 122 bn,  
the equivalent of 40% of hydrocarbon GDP each year) to increase its oil  
and gas production capacities and to boost petrochemical production.  
In the non-hydrocarbon sector, prospects are not as clear. For several  
years, Dubai has been caught in a lasting crisis in the real estate sector.  
Due to a structural oversupply, transaction prices and rent have fallen  
constantly since 2015. Passenger traffic growth at the Dubai airport has  
also been constantly losing momentum since 2015 (+4.3% on average  
in 2015-19, vs. +11.2% in 2009-14), and it has slipped into negative  
territory since June 2019. Looking beyond the cyclical influence of the  
The bank  
for a changing  
world  
th  
Eco Emerging // 4 Quarter 2021  
economic-research.bnpparibas.com  
2
2
hydrocarbon sector, this downturn could signal Dubai’s relative loss  
of attractiveness as a destination. Airport traffic trends at Dubai have  
fallen short of global passenger traffic growth since 2019. Generally  
speaking, since 2020, the authorities have engaged in a programme to  
improve the UAE’s attractiveness for companies and residents alike at  
a time of growing regional competition.  
COMMERCIAL BANKS’ BALANCE SHEET: MAIN ITEMS (YOY, %)  
30  
60  
50  
Deposits  
Claims on the private sector  
Claims on the public sector  
Net Foreign Assets (USD bn), RHS  
25  
20  
15  
10  
5
0
40  
30  
20  
SOLID MACROECONOMIC FUNDAMENTALS  
Despite the sharp contraction in GDP growth, the fiscal and external  
accounts have not deteriorated much. In 2020, according to our  
estimates, the fiscal deficit amounted to about 5.5% of GDP. Accounting  
for about 45% of total revenue, hydrocarbon revenue fell by a third  
as oil production and prices plummeted. Total spending contracted by  
about 15% despite specific economic support measures, equivalent to  
about 2% of GDP. The UAE is expected to report a slight surplus in 2021  
10  
0
-
-
10  
20  
-5  
(
1.8% of GDP) thanks to a significant increase in hydrocarbon revenue  
-
10  
-30  
2021  
and a mild increase in spending. Yet this still falls far short of the pre-  
pandemic level of 2019.  
2
015  
2016  
2017  
2018  
2019  
2020  
SOURCE: IMF, BNP PARIBAS  
Public solvency is bolstered by the moderate level of consolidated  
government debt (36% of GDP in 2020) and by very large sovereign  
wealth funds (more than twice GDP), the majority of which are held  
by the Emirate of Abu Dhabi. Each emirate is fiscally autonomous  
CHART 2  
(
excluding defence and security budgets, which are federal) and can  
The increase in credit risk is not a systemic risk. Bank liquidity is still  
comfortable given the slow growth of domestic lending and the increase  
in deposits (+1.1% in June 2021). Lending to the private sector (70% of  
domestic lending) was down 2.1% y/y in June 2021 (-1.6% for domestic  
lending). With the slowdown in lending and the upturn in government  
deposits thanks to the improvement in the oil cycle, the net external  
position of the banking sector shows a significant surplus: USD 36 bn  
in March 2021, up from USD 16 bn in March 2020. The central bank  
has set up measures to support the banking sector: liquidity injections,  
the easing of certain prudential standards, and key rate cuts (by  
issue debt in the international markets. Since 2020, a total of about  
USD 25 bn has been issued by the Emirates of Abu Dhabi (USD 20 bn,  
or about 10% of Abu Dhabi’s GDP), Sharjah (USD 2.3 bn, or 7.4% of  
GDP) and Dubai (USD 2.9 bn, or about 2.8% of Dubai’s GDP). Abu  
Dhabi’s bond issues go beyond the financing of any fiscal deficits or the  
rollover of maturing debt. Thanks to regular bond issues, they serve  
as a benchmark for other issuers. As to Dubai, part of its financing is  
used to support certain ailing state-owned enterprises (notably in the  
transport sector). Moreover, for the first time, the federation issued  
an international bond in October 2021 for a total amount of USD 4 bn.  
The federation has been authorised to call on market funds only since  
1
25 bp in 2020). In general, although systemic banks can be assured  
of receiving federal support if needed, support is more selective for the  
government-related entities (notably in the real estate sector), which  
fall under the responsibility of the federated governments, which have  
more limited resources.  
2
019. It should finance infrastructure projects.  
The external situation is very comfortable, with high and recurrent  
current account surpluses, even during downturns in the oil cycle.  
These surpluses have averaged 7% of GDP since 2016, and we are  
forecasting a surplus of 6.8% of GDP again this year. Foreign reserves  
are currently equivalent to about 4.5 months of imports of goods and  
services.  
Completed on 6 October 2021  
PERSISTENT CREDIT RISK  
The exposure of banks to the sectors hit hardest by the economic  
slowdown has had a negative impact on the quality of loan portfolios.  
At the federation level, the non-performing loan ratio rose to 8.2%  
in June 2021 (according to the IMF), the highest among the Gulf  
countries, up from 6.5% at year-end 2019. In Dubai, a number of real  
estate developers are experiencing financial troubles and have begun  
to renegotiate their debt, which could lead to partial defaults. The  
construction and real estate sectors accounted for 20% of domestic  
loans outstanding in June 2021.  
Pascal DEVAUX  
pascal.devaux@bnpparibas.com  
The bank  
for a changing  
world  
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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