UAE on recovery path

The UAE is heading in the right direction with the economy on rebound mode, thanks to ongoing fiscal stimulus measures, spending related to hosting Dubai Expo 2020, rate cuts, and continuing diversification efforts, said UBS, a Swiss financial services company.

Ali Janoudi, UBS' head of Wealth Management Middle East and Africa, said the UAE is on a slow recovery path from the 2014-2017 oil shock, and significant fiscal buffers remain in place. However, he noted that headwinds would persist this year and the next, due to lingering trade tensions, the global economic slowdown, low energy prices, Opec-led production cuts, and regional tensions.

"The UAE is moving towards the right direction by making reform and diversification efforts along with other countries such as Saudi Arabia, Egypt, Morocco, among others and growth is expected to pick up in 2020," said Janoudi. "We expect ongoing pressure on the local real estate market to ease in 2020, but the construction sector is unlikely to see a significant rebound this year."

The Swiss financial service provider said UAE's growth should, however, pick up somewhat thanks to the ongoing fiscal stimulus measures, spending related to hosting Dubai Expo 2020, rate cuts in line with the Federal Reserve, and continuing diversification efforts. "Key credit strengths of the UAE include a history of domestic political stability, a high GDP per capita, and hydrocarbon reserves of more than 70 years at the current rate of production. The economy is fairly diversified, but growth and public finances still depend on hydrocarbon exports and oil-driven liquidity in the region," said Janoudi.

The UAE's central bank revised its growth forecast for the economy upward to 2.4 per cent for 2019, and said that the improved outlook for growth is due to expected rising public and private spending at the federal and emirate levels, higher investment before the highly-anticipated Expo 2020 and continued regional economic recovery, in light of the monetary policy easing in the US.

According to the Institute of Chartered Accountants in England and Wales, the UAE economy is expected to expand by 2.2 per cent in 2020 amid a general recovery in the Middle East.

Across the GCC, the outbreak of the coronavirus had a limited direct impact on the economies and societies so far, but it might still weigh on these countries indirectly, through its negative impact on global growth, energy and basic material prices, and consumer spending, for example in tourism, the Swiss company said in a report.

"We believe the downside is contained, but acknowledge the risk that the virus might spread further and faster, with a more significant impact on the global economy. In this case, the spill-over effects on the UAE will be larger too, and the risk for more infections locally would also rise," said the report.

Michael Bolliger, head of Asset Allocation Emerging Markets, said the countries in the GCC currently benefit from low US interest rates, and we see a very low likelihood of exchange rate pegs coming under pressure. "But volatile oil prices, which have a strong impact on public finances, and geopolitical risks will continue to pose challenges for the region in the coming years. The need for reforms remains high, in our view."

UBS said in its report the credit fundamentals of the sovereigns in the Middle East and Africa has remained fairly stable in 2019. The outlook for the region for this year and next remains fairly solid, according to the latest UBS Chief Investment Office report on emerging markets.

"The impact of trade tensions on investment, the ongoing slowdown in the Eurozone, and a more challenging backdrop for the energy market has served as impediments and remain major risks particularly for oil-driven economies in the region. But inflation has fallen even lower and enabled many central banks to cut interest rates to support credit growth and government fiscal metrics have remained stable on aggregate thanks to prudent fiscal management and healthy nominal GDP growth," the report said.