Staying ahead of the curve

The twin shocks of COVID-19 and a plunge in oil prices tossed the world economy into the greatest recession since World War II, but the UAE is weathering the negative trend and analysts expect the country to post significant growth this year

Though the UAE has a far more diversified economy compared to its Gulf neighbours, oil still contributes significantly to the country’s gross domestic product (GDP). However, any volatility in the global and oil markets can dampen investor confidence and affect the country’s economic performance.

The twin shocks of the COVID-19 pandemic and low oil prices tossed the world economy into the greatest recession since World War II, however, the UAE is weathering the negative trend in global markets and analysts remain optimistic about the country’s growth this year.

Moody’s affirmed its Aa2 issuer rating of the UAE in May, saying the rating is “supported by the relatively muted impact of the pandemic on the federal government’s fiscal strength,” in part due to an effective policy response to the virus.

As part of the government’s initiatives to open its economy, the UAE is the most vaccinated nation globally with 75.6% of the population having received first dose of COVID-19 vaccine and 65.8% received two doses of the vaccine, as of July 11, 2021.

IHS Markit said that business conditions in the country’s non-oil private sector continued to improve in June, although at a weaker pace, due to prolonged pandemicrelated curbs and border closures.

The UAE’s efforts to diversify the economy away from heavy dependence on oil revenues are opening more investment opportunities in the non-oil private sector and are critical to achieving sustainable growth. “The UAE’s institutions and governance strength has been demonstrated by the spearheading of reforms destined to improve the business environment, and the progress made on diversifying the economy and fiscal revenues away from the hydrocarbons sector,” said Moody’s.

Compared to other GCC countries, the UAE has a slightly better public debt outlook and the implementation of structural reforms to nurture sustainable growth and the development of transparent rules-based fiscal frameworks is expected to spur long-term sustainable growth.

Bolstering the coffers

Despite the UAE central bank’s decisive and far-reaching actions that have helped to prop up the economy since the arrival of the pandemic, the financial services sector continues to operate in a challenging environment characterized by low interest rates while dealing with issues relating to counterparties’ creditworthiness and provisioning, said KPMG. Analysts projected that UAE banks’ profitability will remain squeezed as pressure on net interest income – their main source of revenue – persists and provisions increase further.

However, S&P Global estimated that gross lending growth will accelerate slightly this year as UAE banks recycle the central bank’s liquidity support to help their clients navigate the pandemic crisis and due to borrowing by the government and its related entities ahead of Expo Dubai 2020. Lending growth is also expected to be supported by an increase in corporate borrowing as some firms will be executing capital expenditures that were deferred last year.

Compared to their regional peers, UAE banks are digitalizing complex processes and end-to-end customer journeys across the front, middle and back offices to meet the evolving needs and expectations of customers that includes the quest for self-service, seamless, automated, and omnichannel experience – with the minimal waiting time.

The country’s first independent digital banking platform, YAP, was launched in March. Other neobanks that are yet to launch in the UAE include Zand, the first Shari’ah-compliant digital-exclusive bank and while ADQ is also looking to set up a digital bank using a legacy banking license of First Abu Dhabi Bank. “The UAE has a strong regulatory foundation for the launch and operations of digital-only banks,” said KPMG.

THE UAE’S INSTITUTIONS AND GOVERNANCE STRENGTH HAVE BEEN DEMONSTRATED BY THE SPEARHEADING OF REFORMS DESTINED TO IMPROVE THE BUSINESS ENVIRONMENT, AND THE PROGRESS MADE ON DIVERSIFYING THE ECONOMY AND FISCAL REVENUES AWAY FROM THE HYDROCARBONS SECTOR

– Moody’s

Fiscally fit

The UAE Cabinet approved a $15.8 billion (AED 58.3 billion) budget for the fiscal year 2021 last November. The 2021 federal budget is aimed at advancing the country’s development plans and projects to improve standards of living and provide a decent life for citizens and residents alike. Despite the current fiscal budget being smaller than last year’s $17 billion (AED 61.35 billion), the UAE government allocated a larger share of it towards social development including social welfare, health, and education.

In April, the International Monetary Fund (IMF) revised the UAE’s growth forecast for 2021 from 1.3% in October 2020 to 3.1% on the back of recovering oil prices and the country’s advanced vaccination rate – which both cushioned the economy against the second wave of the virus. The UAE’s highest level of herd immunity together with a surge in exports in the next 24 months is expected to provide an additional boost to the nonoil private sector.

Fitch affirmed its ‘AA-’ issuer rating of the UAE and the rating agency stated that it reflected the country’s moderate consolidated public debt level, strong net external asset position and high GDP per capita.

In a regionally coordinated move, central banks across the GCC region are also extending their stimulus aid schemes as part of regional governments’ efforts to shore up their economies which were hit by pandemiccontainment measures.

In April, the Central Bank of the UAE (CBUAE) said that it was extending “integral parts” of the Targeted Economic Support Scheme (TESS), the Emirates’ economic stimulus scheme, until mid2022. The extension of key components of TESS gives UAE licensed banks access to a collateralized $13.61 billion (AED 50 billion) zero-cost liquidity facility until June 30, 2022, to provide loans to individuals, SMEs and private sector entities that were affected by the outbreak of the virus.

Since its inception, the TESS program has benefitted over 320,000 customers, including individuals, SMEs and other private corporations as of March, said CBUAE.

“A loan deferment program and extensive CBUAE support have supported earnings at the UAE’s top banks, although net interest margins slid and impairments will likely increase as repayment holidays end,” S&P Global said in a report last December.

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Diversification drive

Expo 2020 Dubai

The World Bank expects Dubai’s hosting of the World Expo later in October to stimulate sustainable growth in the UAE driven by economic stimulus measures being implemented by the Dubai and Abu Dhabi government. Expo 2020 Dubai was delayed by a year following the pandemic.

“Expo 2020 Dubai and its legacy are expected to contribute $33 billion (AED 122.6 billion) of gross value added (GVA) to the UAE’s economy from 2013–31 as well as support up to 905,200 full-time equivalents (FTE) job-years, which is equal to approximately 49,700 FTE jobs per annum,” according to EY’s The economic impact of Expo 2020 Dubai report that was released before the outbreak of the virus.

The Dubai Expo site, which will be redeveloped to District 2020 after the expo, is also projected to play a critical role in the country’s future vision by supporting sustainable economic development as the UAE moves towards an innovative-driven economy while creating a business environment to support key growth sectors such as logistics and transport, travel and tourism and property development.

Driving growth

The UAE, both at the emirate and federal level, is introducing several initiatives to spur foreign direct investment (FDI) as part of the country’s push to drive growth in the non-oil sector as authorities are rethinking the role foreign investors can play in easing fiscal burdens and foster sustainability.

The federal government recently introduced programs to shore up investment such as the ‘Make it in the Emirates’ and ‘Operation300bn’, initiatives that are aimed at supporting SMEs for the next 10-years to boost their contribution to the country’s economy output.

Under the ‘Operation300bn’, the government seeks to enhance the industrial sector’s contribution to the UAE’s economic output, from the current $36 billion (AED 133 billion) to $82 billion (AED 300 billion) over the next 10 years.

The UAE is also betting on both local and international tourism as it looks to boost growth in the country’s non-oil private sector. Last December, the Emirates launched a campaign to promote local tourism and its desert winter. “The Most Beautiful Winter in the World” initiative is part of the federal government’s efforts to double domestic tourism’s $11.2 billion (AED 41 billion) contribution to the economy.

A LOAN DEFERMENT PROGRAM AND EXTENSIVE CBUAE SUPPORT HAVE SUPPORTED EARNINGS AT THE UAE’S TOP BANKS, ALTHOUGH NET INTEREST MARGINS SLID, AND IMPAIRMENTS WILL LIKELY INCREASE AS REPAYMENT HOLIDAYS END

– S&P Global

$15.8 billion

UAE 2021 budget

Source: UAE Federal Government

Structural reforms

The UAE offers foreign investors who are interested in establishing their businesses in the country two options – establishing a presence in the mainland in any of the seven emirates or establishing in one of the UAE’s economic free zones. Last November, the government scrapped a law that required an Emirati shareholder or agent when foreigners are opening a company in the country, a move that is expected to drive FDI. The UAE’s new company law came into effect on June 1 and it will boost the country’s competitive edge in the region.

The abolition of the Commercial Companies Law that required an Emirati shareholder or agent is a significant shake-up to the UAE’s foreign ownership laws and comes almost two years after the cabinet approved a ‘Positive List’ of activities in July 2019 – under which up to 100% foreign ownership is now permitted in mainland UAE entities.

In a major policy shift, the UAE also said that it would offer Emirati citizenship and passport to a set group of foreigners, including investors, professionals, and special talents – a first in the Gulf region as the government looks to give its huge expat population a bigger stake in the economy to drive growth.

KPMG stated that given the current economic impact of the COVID crisis, the move to allow foreign entrepreneurs and investors to fully establish and own companies is a welcome move for new and existing investors and reinforces the country’s appeal as a regional investment hub.

In the first quarter of the year, the government expanded its visa system which now allows university students to sponsor their families, introduced visafree travel with Israel and introduced a remote work visa – which allows foreign employees to live and work from the UAE. KPMG hailed the UAE’s efforts to spur foreign investment, saying the steps come as a welcome move for new and existing investors and reinforces the country’s appeal as a regional investment hub.