The new black
Oil may finally stop dominating the conversation in 2018, thanks to the UAE’s safe-haven status, sound banks and diversified economy.
The UAE has faced facts: lower oil prices are the new normal. The good news is that no other Gulf country has moved so far from its petrochemical roots.
The UAE has travelled a hard road since 2014, when falling oil prices blackened the country’s outlook. With less fuel for the economy, the country’s fiscal and external positions were weakened, financial conditions were tightened, and growth slowed.
However, the UAE’s governments have been far from idle. There have been ongoing initiatives to upgrade the supervisory and regulatory framework for the financial sector, significant subsidy reforms and the timely introduction of VAT.
span style="font-size: small;">Oil’s well that ends well
For these reasons, oil is unlikely to darken the headlines in 2018. Although the IMF predicts the UAE’s GDP growth will drop to 1.3 per cent in 2017, non-oil growth is expected to pick up, suggesting that the country’s diversification strategy is bearing fruit. Moody’s predicts that non-oil economic activity will increase real GDP growth to 3.2 per cent in 2018, following a forecast slowdown to 1.1 per cent in 2017 from 3.0 per cent in 2016.
Abu Dhabi currently derives 50 per cent of its real GDP and 60 per cent of government revenues from the hydrocarbon sector, according to S&P’s 2017 estimates, including oil taxes and royalties, plus dividends from the state-owned giant Abu Dhabi National Oil Co. (ADNOC).
span style="font-size: small;">Despite the current low oil prices, Abu Dhabi maintains one of the highest GDP per-capita levels in the world, and the emirate's very strong net government asset position, mostly in foreign currency, makes its economy resilient to shocks in the commodity market.
The latest Emirates NBD UAE PMI paints a very positive picture. New order growth among non-oil private sector firms accelerated to a 35-month high December 2017, with survey respondents commenting on a strong level of underlying demand; others reported an increasing inflow of new business from government sources.
The rate of growth was solid overall and the strongest recorded in nine months. According to anecdotal evidence, demand from neighbouring GCC countries also picked up in December.
Khatija Haque, Head of MENA Research at Emirates NBD, said, “The UAE’s non-oil sector expanded sharply in the last two months of the year, largely due to a strong rise in output and new orders. It is likely that the introduction of VAT in January has spurred activity and purchasing in Q4 2017, which is in line with our expectations. Nevertheless, employment and wage growth has been relatively muted, not just in December but for 2017 as a whole.”
According to the survey, buying activity growth also remained sharp throughout December. Companies operating in the UAE’s non-oil private sector increased their purchasing volumes in anticipation of an upturn in output requirements.
“The diversified structure of the UAE’s economy has meant that domestic suppliers have been less impacted by the economic slowdown and tight liquidity conditions than exporters, which have been affected by the weak recovery in world trade,” said Seltem Iyigun, Economist for the Middle East at Coface.
span style="font-size: small;">The future is no oil painting
HE Hamad Buamim, President and CEO of Dubai Chamber of Commerce and Industry said at a recent ‘Meet the CEO’ event that Dubai Chamber has projected steady growth in Dubai’s markets in 2018, with the emirate’s economy expanding by three to four per cent. He was quick to point out that 98 per cent of Dubai’s GDP comes from non-oil sectors, including tourism, aviation, hospitality, retail, logistics, and financial services.
The trade sector is expected to account for around 28 per cent of Dubai’s GDP in 2017, with the logistics sector contributing 16 per cent and the financial services sector 11 per cent. Tourism is expected to see a growth of 5.1 per cent, and retain a five per cent growth rate over the next two years.
Buamim also took the opportunity to highlight Dubai’s volume of foreign direct investment, which exceeded $3 billion in the first half of 2017. Total trade—direct and free zones—reached $268 billion during the first nine months, a 3.5 per cent growth over the same period of 2016.
The Dubai government is working to eliminate some of the perceived barriers to entry for foreign companies. Most recently, it announced plans to reform the UAE Commercial Companies Law to ease the foreign investment regulations. This will see certain sectors liberalised from the 51:49 per cent shareholder split currently in place. Should this long-awaited change to the Companies Law take place, there is likely to be a further boom in foreign direct investment.
strong>The IT crowd
According to the Global Competitiveness Report for 2017 issued by the World Economic Forum (WEF), the UAE continued to lead the Arab world in terms of competitiveness, coming in as the 17th most competitive economy among 137 countries.
To further increase its competitiveness, the report said that the UAE will have to speed up progress in terms of spreading the latest digital technologies. With Dubai vying to become the Middle East’s smartest city by 2021, a growing number of local and international fintech companies are already eying the emirate as their future regional base.
The rate of fintech growth in Dubai continues to garner worldwide attention, largely due to the Dubai Blockchain Strategy launched by the Smart Dubai office and the Dubai Future Foundation in 2016. With Dubai moving to become the first blockchain-powered government by 2020, both local and international fintech companies are increasingly viewing the emirate as the testbed for their latest solutions.
While the Dubai government’s digital strategy is an important growth driver of both the fintech and broader technology sectors, the UAE’s young and digitally-enabled demographic is also a drawcard for investors. In a region where more than half of the population is under the age of 25 and where smartphone penetration is among the highest in the world, tech firms see the potential for rapid user adoption rates.
“Our recent efforts within the fintech start-up community have highlighted the need for an even more robust ecosystem and specific infrastructure to be put in place to ease the incorporation process for these new businesses,” said John Martin St.Valery, Founder and CEO, of Links Group. “Promisingly, the Dubai Government recognises this and is eager to collaborate with emerging sectors, such as FinTech, to put in place the necessary frameworks that will help cement the emirate’s position as an epicentre for future industries and the Fourth Industrial Revolution.”
span style="font-size: small;">Bolstering banking
Improving economic conditions bode well for the UAE’s banking sector. "Faster economic growth in 2018 will support the banking system's credit growth, and we forecast credit growth of around five per cent in 2018, after a forecast lower growth of around two per cent in 2017, from 5.8 per cent in 2016 and 8.0 per cent in 2015," said Mik Kabeya, analyst at Moody's.
Moody’s predicts that credit growth will increase to around five per cent in 2018, after a forecast decline to two per cent in 2017, from 5.8 per cent in 2016. The credit ratings agency predicts that loan performance will soften, but only modestly.
Following sluggish economic growth in 2017, Moody’s predicts that problem loans will edge higher, reaching 5.5 to six per cent of gross loans by 2018, from 5.3 per cent in June 2017. This is largely because banks’ loan books are dominated by real estate and government institutions.
Nonetheless, Moody’s expects that funding and liquidity conditions will remain stable. “Stabilising oil prices and international bond issuances will continue to support funding and liquidity, following a tightening during 2016 amid oil price weakness. UAE banks will remain primarily deposit- funded, with some recourse to more volatile market funding,” the credit rating agency said.
Profitability will remain strong. Moody’s said that thinner margins will be balanced by lower operating expenses and stabilising provisioning charges. Pressure on interest margins will reflect higher funding costs, as rising US interest rates translate into higher local currency rates through the currency peg of the UAE dirham with the US dollar.
However, the UAE’s banks can count on government support. “The UAE Government’s willingness and capacity to support local banks if needed will remain very high over the next 12 to 18 months, as reflected by our affirmation and outlook change to stable on the government credit rating in May 2017,” Moody’s said.
According to the UAE Central Bank’s September 2017 Monthly Statistical Bulletin, the banking system’s net loan/deposit ratio had improved to 91 per cent as of 30 September 2017, from 96 per cent as of 30 September 2016.
The UAE may have paused for breath when lower oil prices became an ongoing theme; now they have been accepted as the new normal, economic activity is expected to strengthen as global trade regains momentum and the countdown to Expo 2020 begins.