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30-May-2017

UAE Economics: MENA’s strongest economy is recovering, but is not without its headwinds; SMEs’ adjustment to lower oil prices still ongoing

Economy gathering pace in 2017…

Interim data points to a strong start to the year for the UAE economy, indicating it is turning the page, gradually, from the oil price shock and leading its fellow GCC countries by a good margin. Double-digit growth in tourist arrivals, a year-high in the transaction value of property sales, PMI at a two-year high and strong project awards indicate the recovery is broad-based and showing some resilience to a challenging external environment.
 
…But a few headwinds limit spillover to wider economy

We identify three key factors that will continue to put the brakes on growth and hence the recovery will not be strongly felt on the ground, namely: i) gradual adjustment of the SME sector to the new challenging macro environment, a factor that is still clearly weighing on credit growth and leading to very slow employment growth, in our view; ii) Abu Dhabi’s ‘efficiency drive’, which implies a continued level of fiscal consolidation over the coming few years; and iii) strong dollar environment, which weakens the country’s competitiveness.
 
Dubai to lead strong investment-driven growth outlook

We see the pick-up in economic activity gaining more pace over the coming period, driven mostly by i) Dubai’s expansionary fiscal stance; ii) preparations for Expo 2020 gaining pace; and iii) Abu Dhabi’s receding fiscal tightening. We, therefore, expect real non-oil GDP growth to pick up to 3.0% in 2017 and 3.5% in 2018 from 2.7% in 2016. Overall, GDP growth is likely to decelerate this year, in light of lower crude production, in compliance with OPEC supply cuts. A key feature of UAE’s growth is likely to be faster growth at Dubai vs. Abu Dhabi, as the former enjoys more solid growth drivers and a much more relaxed fiscal stance.
 
Strong fiscal and external buffers leave macro risks muted

The UAE continues to enjoy one of the strongest fiscal and external positions in the GCC, a position recently solidified by strong fiscal retrenchment, which is set to continue over the medium term, albeit at a slower pace. We forecast the fiscal balance to be back in the black, as early as 2018, leaving no major funding needs for the UAE and Abu Dhabi. Dubai, however, will see rising funding requirements as it funds its expansions ahead of the Expo 2020, especially with recent budgets’ restructuring, reducing the budget’s revenues. We, therefore, expect a reversal of recent stabilisation of Dubai’s debt levels, keeping an eye on the gov’t’s ability to manage a growing debt amidst a rising interest rate environment. 
 

Mohamed Abu Basha

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