RaboResearch - Economic Research

Country Report UAE

Country Report



The UAE’s economy is estimated to grow at a solid pace of 4-5% in the coming years. Meanwhile, the run up in asset prices has increased fears of a renewed speculative bubble.    

Strengths (+) and weaknesses (-)

(+) Strong external position

The UAE continuously posts large current account surpluses, which averaged 11% of GDP over the past five years, and its huge net foreign asset holdings means the UAE is a net external creditor.

(+) Sound monetary policy

The long-standing and credible exchange rate peg of the dirham to the US dollar has kept inflation very low, averaging only 1% in the past five years.  

(-) Weak labour market

The unemployment rate of native Emiratis is high at 20% in 2012, as they lack the job skills and incentive to work in the private sector, given high public sector salaries and government handouts.

(-) Rigid political system

The non-democratic political system means the large oil wealth is held mainly by the elite; the ruling families, while freedom of speech for proponents of political reform is highly restricted.  

Key developments

1. Economic growth momentum expected to continue

The UAE economy is estimated to grow at a solid pace of around 4.5% this year and this pace of 4-5% growth is expected to continue in coming years. Abu Dhabi and Dubai are the two largest emirates out of the seven and the only significant regions driving the UAE’s economic growth. Abu Dhabi and Dubai account for 60% and 30% of the UAE’s economy, respectively. The oil sector accounts for 25% of GDP, which is significant but not as high as UAE’s Gulf Cooperation Council (GCC) counterparts, where the oil sectors clearly dominate. Although the UAE will remain dependent on the oil sector for many years to come, its level of dependency is gradually declining thanks in large part to the development of Dubai, which has become a regional trading and financial powerhouse and one of the Gulf region's prime tourism destinations. The non-oil sector of UAE’s economy has outperformed the oil sector for several years now and this will also be the case in 2014. Oil output growth is expected to remain flat in 2014, at around 2.7m barrels per day, after output growth of 5.9% in 2012 and 2.7% in 2013. The non-oil sector is pushing the cart, since consumers and companies have increased spending, as suggested by accelerating credit growth of 7.1% in 2013. The momentum of the non-oil sector has continued, as the monthly HSBC Purchasing Managers Index (PMI) stood at 57.7 in April and has been above 50 every month this year. Since the UAE do not release quarterly GDP figures, the HSBC PMI is the main gauge to assess the private non-oil sector’s health. When broken down by sector, the PMI shows continuing growth in manufacturing, tourism and transport. Expansion in manufacturing, which accounts for more than 14% of non‑oil growth, has been led by heavy industries such as aluminum and petrochemicals. Within tourism, Dubai hosted more than 11m tourists in 2013, which is a rise of 10% from 2012. The property and construction sector have rebounded after it experienced the deepest downturn in the aftermath of the financial crisis of 2008/2009 and has taken the longest to heal. However, since in 2013 residential property prices in Abu Dhabi and Dubai rose by more than 30% and the stocks market rose by more than 50%, speculation and fears of a renewed asset bubble have surfaced. 

Figure 1: Strong growth momentum
Figure 1: Strong growth momentumSource: EIU
Figure 2: Soaring stock markets
Figure 2: Soaring stock marketsSource: Bloomberg

2. Asset bubble 2.0?

In the aftermath of the default of Nakheel in 2009, the property arm of Dubai World, property prices in the UAE fell markedly from their highs in 2008 and the demand and financing for the property sector had dried up. However, since early 2013 the situation has turned around and the sector recovered. The recovery in property prices seems to be based on economic fundamentals more strongly than in 2008. Banks have been willing to lend again to building projects, and credit growth, a key feature of asset bubbles, was recorded at only 7.1% yoy in 2013, which is well below the average of 18% for the period of 1996-2012. Also, the authorities have taken measures to contain rising property prices, which include tighter requirements on mortgage lending, mortgage caps for nationals and expatriates, increasing land supply, and the imposition of higher transaction taxes. Furthermore, the value of sales transactions is still not excessive. According to the Dubai Land Department, the value of sales in nominal terms was USD 38.3bn in 2013, well below the peak of USD 65.1bn in 2008 and even below the USD 47.5bn recorded in 2007. Even so, risks that speculative property purchases have occurred are high and the risk of a correction in the prices of the property markets is present. Another concern is the risk of overcapacity, since several mega building projects in relation to Dubai’s hosting of the World Expo in 2020 have been announced in recent months, but the government has not elaborated on how it intends to manage their delivery to avoid the danger of flooding the market and sending prices back down. Another concern is the risk of a renewed debt crisis. Dubai World has taken steps to resolve its debt troubles during 2009. Nevertheless, the total debt stock of the Dubai government and government-related entities (GREs) remains large, at an estimated USD 142bn. GREs face substantial amounts of maturing debt, which is mostly of debt restructured after 2009, of around USD 40bn in 2015‑2017, according to IMF estimates. The repayment schedule appears challenging and the repayment risks could increase if US interest rates start to climb from the record lows in the near term.

Facstheet of UAE
Facstheet of UAESource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The UAE is richly endowed with oil resources and is home to around 10% of the world’s total proven oil reserves. The UAE consist of seven emirates. Abu Dhabi is the largest and most powerful, oil-based traditional emirate. Dubai, which lacks oil resources, has a more modern atmosphere and depends on international retail, tourism and financial services. The other five emirates have always played a minor role. For almost four decades, oil and global finance have driven the UAE's economy. The UAE has accumulated substantial wealth, since the country’s per capita GDP is now on a par with those of leading Western European nations. In regional perspective, the emirates have, due to successful economic policies, a relatively diversified and open economy with a 25% share of hydrocarbons in total GDP in 2012. Historically, the UAE has one of the most stable political systems in the wider Arab region. The federation has maintained stability since unification in 1971. Even though the political system is inflexible and characterized by an almost complete lack of political freedom, there have been no reports of imminent upheaval since 1971. Political parties are not permitted, the President is Khalifa bin Zayed al-Nahyan. The distribution of power between the emirates and the federal government is hardly contested, with the overall balance of power firmly and increasingly tilted in Abu Dhabi’s favor due to its relative large size and wealth, but latent rivalries between and within individual emirates do exist. Government institutions may change, but society will remain overwhelmingly tribal and dominated by clans and patronage. 

Economic indicators of UAE
Economic indicators of UAESource: EIU



naar boven