GDP growth to edge up after a sharp slowdown in 2023
The ensuing global increase in oil demand on the back of solid Asian growth and the resulting higher oil prices should sustain the United Arab Emirates (UAE)’s economy in 2024. However, the OPEC+ extension of oil production restrictions until the end of 2024 will continue to be a drag. Meanwhile, the non-oil sector activity will remain robust. Rising competition from neighbouring Saudi Arabia will push the authorities to accelerate economic reforms (i.e. new commercial law allowing foreigners to fully own companies, new labour law shifting weekend days from Friday and Saturday to Saturday and Sunday in 2022) which will have positive impact on investments (around 20% of GDP). Easing inflation, and an influx of foreign workers attracted by economic diversification in Abu Dhabi and Dubai (Emiratis constitute roughly 10% of the total population) will help sustain private consumption (nearly 40% of GDP). Moreover, the UAE, which has remained neutral in the war between Russia and Ukraine, have welcomed growing numbers of rich Russian tourists and migrants, but also workers from the high-tech sector fleeing Western sanctions. They will further boost the local real estate market and consumption.
Also, the UAE will continue to act as a trading hub for Russian gold, a role that has increased since the start of the war in 2022. The UAE imported around 76 tonnes of Russian gold worth nearly USD 3 billion between February 2022 and March 2023 compared with 1.3 tonnes in 2021, according to Russian customs. Similarly, since Switzerland applies sanctions, oil trading has moved from there to the UAE, also leading to the development of storage capacities in Fujairah. The political neutrality of the UAE and their strategic location close to African and Asian markets are expected to strengthen these positions. Independently, the government’s strategy to increase the number of foreign visitors to diversify into tourism will also be supportive. The Asia-Pacific and the Middle-East regions will be the two largest sources of arrivals in the forecast period (estimated at between 5.1 million and 5.09 arrivals in 2023, respectively, as per the BMI). In 2024, tourism receipts are expected to rise by 7% y-o-y to USD 43.7 billion (9% of GDP), which also will add to the weight of private consumption. Government consumption (around 12% of GDP), however, will be mostly targeted at business reforms and incentives instead of consumption-boosting stimulus programs. The central bank is expected to walk in the US Federal Reserve’s footsteps in accordance with the peg to the dollar, thereby helping to reduce inflationary pressures. That said, rising rent prices will drive the housing component of the CPI basket (35%), consequently keeping inflation above the 2020-2022 average of around 1.3 percent. Net exports contribution to GDP growth will diminish in 2024, in line with constrained hydrocarbon production, while demand for imported consumption and capital goods’ will remain strong on the back of resilient private consumption and large infrastructure projects.
Narrower twin surpluses expected in 2024
Flat oil production, which generates around 50% of fiscal revenues and around 60% of merchandise exports, will drag on budget and current account surpluses. The UAE’s oil production is estimated to fall by nearly 3% in 2023 and will stay almost flat in 2024 (around 4 million barrels/day) due to the OPEC+ decision in June 2023 to cut output further and extend the restriction period until end-2024. Non-oil fiscal revenues on the other hand are expected to rise on back of the introduction of the UAE’s first corporate tax of 9% early in 2023 and resilient private consumption. Higher trading revenues are expected. On the expenditure side, public investment linked to economic diversification will raise demand for imported capital goods. Higher service imports such as outbound travelling will add to the deficit of services. Introduction of different types of visa allowing a larger immigrant population will increase the remittance outflows (net private transfers estimated at 9% of GDP in 2023). The UAE will continue to record ample foreign exchange buffers. The central bank holds around USD 160 billion in foreign assets at June 2023. The Abu Dhabi Investment Authority (ADIA) has an estimated USD 850 billion worth of assets under management. This supports the UAE’s strong position to maintain the currency peg in place.
Political stability in a volatile region
In March 2023, the UAE’s leader named his eldest son as Crown Prince of Abu Dhabi and his likely successor as President of the Federation. This reshuffle is expected to have a limited impact on the political stability on the UAE. Current stability is set to reinforce the country’s, global and regional, shipment and trade hub position. However, the emirates’ level of transparency and democracy will continue to represent challenges as security and social benefits rely mostly on oil revenues. The UAE shares maritime borders with Iran and tensions between the two countries have fluctuated in the past. After six years of tense relations, ties between the two started to improve in 2023 at both government and private-sector levels. The two countries reopened their respective embassies and held high-level official visits. This will help to ease tensions in the region and could increase trade and business opportunities in sectors such as tourism, infrastructure, and technology.