For those looking through the glass-half-empty prism, the dramatic drop in private sector sentiment identified in the latest monthly purchase managers index (PMI) provides ample proof that the non-oil economy is hurting.

The headline index for the UAE dipped to 51.1 in September from 51.6 in August, the lowest reading since May 2010. Domestic and external demand weakened and new export orders declined. Persistent real estate weakness is another negative for Dubai in particular, with rising supply and tepid demand forcing prices down.

UAE key economic data
2016 2017 2018 2019f 2020f 2021f
Real GDP growth (% change) 3 0.8 1.6 2.6 3 3.2
Inflation (% change) 1.6 2 3.1 1.9 2.2 1.9
Fiscal balance (% of GDP) -2 -1.6 -1.6 0.6 1 1.3
Current account balance (% of GDP) 3.7 6.9 7.2 7.8 6.4 5.6

f=Forecast. Source: World Bank

GDP growth

Yet those with a rosier outlook can also find evidence to support their thesis. The IMF for one still expects a respectable 2.8 per cent GDP growth figure for this year. The Central Bank has revised upwards its GDP growth estimate to 2.4 per cent, in light of a 5 per cent increase in oil sector growth which compensates somewhat for the weakness in the non-hydrocarbons sector.

Governments at both federal and emirate level are, meanwhile, looking at boosting spending, which should also yield a beneficial economic impact. The 2019 federal budget envisaged a 17.3 per cent increase in spending over the previous year, and next year’s federal budget will increase to AED61.6bn ($16.8bn), the highest level ever, while Abu Dhabi is in the midst of an AED50bn extra-budgetary fiscal stimulus programme.

Moves are also underway to reduce fees for businesses and consumers. In July 2019, the government reduced and cancelled fees for a range of federal services. In Dubai, meanwhile, there is fevered anticipation of the economic bounty that will result from the Expo 2020 project, expected to lead to a 20 per cent increase in tourists to Dubai in 2020 to 20 million.

International reserves of the UAE (AEDbn)
Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
International reserve position 339 333.6 329.8 365.4 379.8
Foreign assets 336.3 331.1 327.3 362.6 377.1

Source: UAE Central Bank quarterly review

Outside influences

This mixed economic picture reflects a confluence of regional and domestic issues. The UAE cannot insulate itself from global challenges. The recent difficulties experienced by the country’s private sector – witnessing a reduction in both foreign and local demand – points to the impact of both the global downturn, and to the lasting effect a sanctioned Iranian economy has had on its major Gulf trading partner, the UAE.

The consultancy Capital Economics has warned that Dubai remains one of the most exposed economies to the downturn in Iran, which will weigh on the emirate’s key logistics, tourism and manufacturing sectors.

Other analysts point out that regional tensions are not helping. “The prolonged period of uncertainty in the region affected investors’ sentiment,” says Issa Hijazeen, senior economist, economic research group at National Bank of Kuwait. “Recent developments in the trade war between China and the US and re-imposing sanctions on Iran have added to these challenges.”

The trade war instigated by President Tump has impacted the steel and aluminium industry in the UAE.  Meanwhile, weakness in the wholesale and retail trade and construction sectors continues.

Flagging demand

Domestic consumption is unable to compensate fully. In the view of Dubai-based Emirates NBD’s research team, a weaker jobs market, stagnant wages and higher taxes and borrowing costs have all contributed to lower private consumption. “Shrinking expats, declining private investment and consumption contributed to sluggish growth,” says Hijazeen.

The figures bear out the flagging demand picture. Whereas private consumption once made up half of the UAE’s GDP, in 2018 this declined to just 30.1 per cent, with lower household spending one of the main contributors.

Where there is a problem, there is also opportunity. The downturn in demand leaves room for government spending to step in and fill the gap.  Analysts have advocated a more expansionary fiscal policy, taking into account the UAE’s substantial revenue buffers.

Outward remittances (AEDm) Q1 2017 Q1 2018 Q1 2019
37,048 43,503 38,415

Source: UAE Central Bank quarterly review

Budgetary management

Yet despite increased federal spending envisaged for the 2019-2021 period, the overall evidence suggests no substantial uptick in expenditure in the past year.

According to official data revealed by Emirates NBD, total government spending increased 3.5 per cent in 2018 in year-on-year terms, whereas revenues rose by 18.7 per cent in the same period. The non-oil budget deficit has declined by almost 40 per cent in the past three years, thanks to higher tax revenues. First-half 2019 figures show a similar picture, with revenues exceeding spending.

UAE economyThe UAE authorities are still inclined towards a cautious approach to budgetary management. It is proud of the fact that it was one of the few Middle Eastern oil-producing states to record a budget surplus last year. Despite the increase in income, there are limits to what the government can spend.

“Financing stimulus plans, with weak oil revenues, will present a challenge to the emirate in the medium term,” says Hijazeen.

However, the green shoots of a more ambitious fiscal approach may already be emerging. According to Central Bank figures for the first quarter of 2019, consolidated government expenditure (taking in federal and emirate spending) rose to AED119bn ($32.4bn), an increase of almost 22 per cent compared to the same quarter in 2018.

Encouragingly, there is evidence that more of the spending at state level is being directed towards economically productive industries and services. Capital spending in the first quarter increased by 94 per cent, reaching AED13.1bn ($3.6bn), according to the Central Bank.

Debt levels

There are fears about the debt situation at the quasi-state level, with Dubai’s government-related entities (GREs) still facing debt equivalent to about 50 per cent of GDP, according to Capital Economics, of which some two-thirds is expected to mature by the end of 2023.

“Expo 2020 will help support the non-oil economy in the UAE, but it’s unlikely to see growth increasing over 5 per cent in the medium term as exogenous shocks will continue to weigh on the non-oil economy. Real non-oil growth will range between 2-3 per cent in the medium term,” says Hijazeen.

The concern is that once the Expo 2020 project is over, there is likely to be significant overcapacity in certain areas of the economy that will ultimately weigh on the GREs’ revenue streams. This in turn could make it more difficult for them to service their debts – making a restructuring more likely.

Were their balance sheets to feel the strain, on past performance, the Abu Dhabi government might once again be requested to bail some of them out.

For now, though, the UAE government’s priority is getting public spending to play a more proactive role in stimulating the flagging non-oil sector. With Abu Dhabi having recently secured $10bn through its first international sovereign bond sale in two years, this may be just what it has in mind.