UAE Economic Overview: Arab World’s Second Largest Economy Due for a Soft Landing

The UAE economy is expected to weather the turbulence caused by the oil price collapse better than its Arab neighbours, as Abu Dhabi advances its strategy of economic diversification focusing on tourism, technology and skilled labour.

Growth for the United Arab Emirates (UAE) slowed to 3.9% in 2015, down from 4.6% the year before, according to the International Monetary Fund (IMF). The IMF expects the UAE economy to expand 2.4% this year and 2.6% in 2017. By comparison, the combined economies of the Middle East, North Africa, Afghanistan and Pakistan are projected to grow 3.1% this year and 3.5% in 2017.

The Institute of International Finance (IIF), a Washington-based association of the financial services industry representing 500 members in 70 countries, is more optimistic about the UAE’s growth prospects. The organization recently projected the UAE to grow 3% in 2016.

The slowdown largely reflects the sharp decline in oil prices over the past two years. Crude oil exports represent about 30% of the UAE’s gross domestic product, which makes the country vulnerable to shocks in the energy market. Analysts at major global banks, including Barclays, Goldman Sachs and Morgan Stanley, believe the latest oil-rice rally is not sustainable and is due for a correction.

Crude prices gained more than 3% last week, with US WTI futures setting new highs for the year.

However, the UAE economy is clearly better positioned to withstand additional headwinds caused by collapsing oil prices than its regional ally Saudi Arabia. The Saudi monarchy, which heads the Middle East’s biggest economy, recently announced plans to diversify away from oil dependence. This includes raising a $2 trillion Public Investment Fund (PIF) to help wean the kingdom off oil.

In this respect, the UAE has a clear advantage. The country already launched a diversification and liberalization strategy to reduce its dependence on oil. In 2008 Abu Dhabi launched its Vision 2030 blue print, which identified nine pillars to revamp the Emirate’s economy. This included increasing the size of the private sector, creating a sustainable knowledge-based economy, boosting local infrastructure and improving the regulatory environment.

The Emirate of Dubai launched a similar economic diversification program targeting economic and social development, and infrastructure development. The latest version of this strategy is called Dubai plan 2021.

The IMF has noted the UAE’s efforts to reduce oil dependence.

“Oil-exporting countries have also attempted to diversify their economies away from oil, but this has proven challenging,” the IMF said in its April World Economic Outlook report. “Nevertheless, opportunities exist. For example, the United Arab Emirates has endorsed an ambitious target to draw 24 percent of its primary energy consumption from renewable sources by 2021.”

Early signs seem to indicate that this strategy is working. The UAE’s total non-oil international trade increased 10% to Dh1.75 trillion in 2015, the Ministry of Economy said last week.

However, given that oil continues to be a major source of government revenue for the Emirates, investors can expect a few stumbling blocks along the way for the diversification agenda. Falling oil prices have curbed employment growth and placed greater pressure on the real estate market. According to Fitch, a US-based rating agency, house prices in the UAE will decline 10% by the end of 2016 following a similar decline last year.

Markit Economics reported earlier this month that the UAE’s non-oil business growth showed signs of stalling in April. The Emirates NBD UAE PMI, which provides a snapshot of business conditions in the non-oil private sector economy, declined to 52.8 in April from 54.5 in March.

“Growth momentum in the UAE slowed a little in April after rebounding in March,” Khatija Haque, head of MENA Research at Emirates NBD said in a statement. “External demand remains relatively subdued, and firms appear to be reluctant to increase hiring, despite solid growth in new orders and output last month. The PMI data year-to-date points to slower, but still positive, growth in the UAE’s non-oil sector, which is in line with our expectation for slower real GDP growth in 2016.”

The report noted an overall slowdown in output and new work. It also said employment growth stagnated after 51 consecutive months of job gains.

The recent slowdown in the Emirates places even more force behind the need for economic diversification. This will likely be the country’s best defence against future downshifts in oil prices.

Sam Bourgi is a financial market analyst for economiccalendar.com. He has more than six years of progressive experience in economic and financial analysis, research consulting and sectoral analysis. As a published author in government, peer-reviewed, online and industry sources, he has developed a fundamental approach to the financial markets with a broad focus on stock indices, commodities and the technology sector. He earned his Bachelor’s Degree from the University of Windsor and Master’s degree from McMaster University.