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14-Aug-2018

UAE Economics - Economy’s slowdown may be nearing its bottom; how quick it recovers is an open question

Gov’t hitting the right buttons, but the devil is in the details

The UAE economy’s slowdown is likely coming closer to its trough, given the recent recovery in oil prices and policymakers’ moves to take measures aimed at stimulating the economy. How quickly the economy recovers from such a trough, and by what magnitude, however, remains an open question. While the intended measures announced by the federal government [including: i) extending visas for expats; ii) openness to foreign investment; and iii) reducing business fess] have, indeed, tackled a number of the structural challenges weighing on the economy, they were quite thin on details, making it challenging to assess the extent of their effectiveness for stimulating growth. Regarding the new investment law, it is yet to be seen how large of an umbrella it will grant to foreign investors, following comments by government officials that 100% ownership will be granted to only a few sectors. With regards to visa extension for expatriates, it is yet to be seen whether there will be a real transformation in the system, where residencies are extended to them independent of employers. 
 
Maintain weak growth outlook in 2018, mild improvement in 2019

With details of the government policy measures to stimulate growth to be announced later this year, we opt to maintain our conservative outlook on growth in the short term, given the number of headwinds the economy is likely to continue facing. We forecast real non-oil GDP growth to slow to 2.4% in 2018, from 2.5% in 2017 before a mild up-tick in 2019 to 2.7% on recent fiscal stimulus by both Dubai and Abu Dhabi. A strong dollar and economic adjustments in the neighbouring GCC countries, particularly Saudi Arabia, are likely to still weigh on growth, especially in the tourism and retail sectors. Abu Dhabi’s announced AED50bn three-year stimulus package signifies a shift in the fiscal stance; nevertheless, its magnitude – at 1.4% of non-oil GDP per annum – is still shy from making any significant impact on the economy, especially when GREs have not yet picked up, in terms of investment spending.  This is being seen across nearly all oil-exporting economies as they are taking more time to assess the sustainability of the surprisingly sharp spike in oil prices before making any long-term spending commitments. As such, the rally in oil prices this time might not provide the economy with the impulse seen in previous times, in our view. 
 
Weak start to the year; Dubai disappoints as tourism and real estate drag growth

Following its disappointing slowdown in 2017, the UAE economic slowdown still persists. Tourist arrivals growth continues to slow, with the sector facing the challenges of economic adjustment in the GCC, reflected in lower arrivals from heavy-spending GCC nationals, as well as strengthening USD. Weakness is spilling over to the aviation sector and the economy’s barometer, the property sector, is unsurprisingly still softening, reflected in falling rentals and property prices. Moreover, Abu Dhabi’s weak fiscal stance still persists, albeit at a much slower pace, compared to the previous three years. In parallel, Dubai’s structural weakness – evident in the decline of business licence issuances, for the third year in a row, and a spike in the cancellation of existing licences (see Fig. 28 & 29) – are still weighing on growth. The construction and trade sectors are the main bright spots amidst such weakness, driven partially by public spending in Dubai, ahead of Expo 2020. 

Mohamed Abu Basha