Ekonomske analize
United Arab Emirates

United Arab Emirates

Population 9.5 million
GDP 38649 US$
A4
Country risk assessment
A2
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Synthesis

major macro economic indicators

   2014 2015 2016(f) 2017(f)
GDP growth (%) 3.1 3.8 2.7 2.6
Inflation (yearly average) (%)  2.3 4.1 3.5 3.1
Budget balance (% GDP) 4.9 -2.1 -3.9 -1.9
Current account balance (% GDP) 10.0 3.3 1.1 3.2
Public debt (% GDP) 15.6 18.1 18.9 18.8

 

(f) Forecast

STRENGTHS

  • Among the most diversified economies in the Middle East
  • Importance of Abu Dhabi, which holds about 90% of AEU's substantial hydrocarbon reserves
  • Dubai's growing importance in services (regional business centre, world's seventh largest port)
  • Important financial base thanks to the Abu Dhabi sovereign fund
  • Political stability of the Federation

WEAKNESSES

  • Diverse economies, still dependent on Abu Dhabi's hydrocarbon revenues
  • High external debt of Dubai's quasi-public entities
  • Quasi-public entities lack transparency
  • Problem of demographic balance, due to size of the foreign population

RISK ASSESSMENT

Slowdown in activity in 2016 and slight recovery in 2017

UAE economy remains more diversified than that of the other GCC countries and has shown some resilience in the face of lower hydrocarbon prices. The slowdown in oil production and the decline in public spending had repercussions on the non-oil economy. Abu Dhabi, which remains the most dependent Emirate on hydrocarbon sector (49% of GDP), should experience a more marked slowdown in 2017, following the cuts in capital spending and less transfers to quasi-public sector companies. Dubai should be more resilient, even though non-oil activity will show signs of a loss of momentum. At the Federation’s level, financial and tourism sectors will continue to drive growth. In contrast, construction will continue to experience difficulties. Distribution and trade will also suffer from less dynamic consumption. Investment will slow in response to the fall in public procurement, which will have an impact on credit growth. Exports will continue to be hampered by  the dollar appreciation, to which the dirham is pegged, and the hike in US interest rates should reinforce this trend. The slight rise in oil prices could, however, temper this soft economic environment and give a slight impetus to activity.  Inflation will remain contained in 2017, as the effect of removing subsidies will have been absorbed. The fall in property prices could also put pressure on overall price levels.  

 

Improvement in the public deficit and the current account surplus

The public deficit widened significantly in 2016, but is still smaller than that observed in the other GCC countries. The fall in hydrocarbon prices from an average of USD 52.2 in 2015 to USD 44 in 2016 affected the Federation's budgetary income. In 2017, the public deficit will be lower, as the expected modest recovery in oil prices is projected to take the pressure off the public finances. Non-oil revenues will develop only weakly compared to 2016, following the adjustments to taxes and royalties aimed primarily at expatriates. Spending is expected to remain unchanged compared with 2016, with a forecast budget of USD 13bn, whose main items will be the development of the energy and water sectors, and the Sheikh Zayed housing programme. Moreover, a plan covering the period 2017-2021 is designed to rationalise and prioritise public spending over five years. This plan will place more focus on education and health spending and aim to limit the pressure on public infrastructure caused by rapid population growth. The appearance of a public deficit from 2015 initially constrained the governments of the Emirates to draw on their financial reserves and subsequently to issue debt on the international markets, like the USD 5 billion bond issued by Abu Dhabi in May 2016.  The amount of debt at the Federation level will remain sustainable, provided the seven Emirates apply the principle of budgetary solidarity, but the amount of quasi-public debt remains concerning for Dubai. Indeed, the Gre’s debt represent 70% of Dubai GDP against 27% for Abu Dhabi. Despite the downturn in public deposits, the banking sector remains liquid. The Emirates' banks are profitable and well capitalised.

Reliant on oil exports, the external accounts are expected to recover in 2017, having been constrained by the slowdown in exports in 2016. An appreciation of the dollar following the hike in US interest rates could however limit the competitiveness of exports, especially of non-oil exports.  The attractiveness of the property sector could also suffer, thus limiting its attractiveness for foreign investors. The central banks' reserves will continue to be maintained at a high level. These totalled USD 81bn in October 2016.

 

Away from the tensions of the Arab world

The United Arab Emirates stands out for the stability of its political and security situation in the region. However, the Federation plays a regional role, particularly within the coalition in Yemen and Syria. The business climate, considered as one of the most favourable in the area, is on an improving trend, thanks to the expected passing of the new insolvency law, which should provide a framework for the process for the winding up and restructuring of companies in difficulty. Conversely, the "emirisation" programme for jobs, under which recruitment is based on nationality, could be an obstacle to foreign investment.

 

Last update: January 2017

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