Trade, tourism make UAE best performer in Mena

dubai - Financial buffers, safe-haven status, infrastructure and a diversified economy help cope with low oil prices

The UAE is on track to be one of the best performers among the Middle East and North African economies over the next five years as its vibrant growth continues to be driven by trade and tourism, a forecast by the Institute of International Finance said.

"The UAE continues to be the best managed economy in the region. The Emirates possesses large financial buffers - estimated at around $670 billion, safe-haven status, excellent infrastructure and a relatively diversified business-friendly economy, which will help the economy cope with the prolonged low oil price environment," said Garbis Iradian, chief economist for IIF.

He said diversification into tourism, non-hydrocarbon trade and financial services would continue to mitigate the adverse impact of low oil prices. Hydrocarbon GDP accounts for only 30 per cent of total GDP and oil exports for slightly less than 40 per cent of total exports.

The UAE also continued to improve the business environment and competitiveness, even from an already high global ranking by the World Bank and the World Economic Forum.

The International Monetary Fund said in its latest outlook for the UAE that better days are ahead for the emirates with the economy right on track for a rebound with a 3.4 per cent surge in 2018.

Jihad Azour, director of the Middle East and Central Asia at the IMF, projected a 1.3 per cent growth in UAE's real GDP in 2017, while the overall GCC growth is expected to bottom out at 0.5 per cent this year, the lowest since the 0.3 per cent growth recorded in 2009 in the wake of the global financial crisis.

Iradian said the UAE's economic performance would improve in 2017 and 2018 with firming oil prices, an improvement in global trade and the expected easing pace of fiscal adjustment. But headline growth (oil and non-oil combined) will decelerate to 1.5 per cent in 2017 due to oil production cuts under the extended Opec agreement, said Iradian.

"We expect non-oil real GDP growth to accelerate to 3.0 per cent in 2017 and 3.5 per cent in 2018, supported by investment and non-oil exports of goods and services. Several high frequency economic indicators, including the Purchasing Managers' Index [PMI], retail sales and number of tourist arrivals over the first nine months of 2017, suggest improvement in sentiment and private sector activity," said Iradian.

The PMI averaged 55.8 in the first three quarters of 2017 as compared with 53.8 during the same period of last year (50.0 threshold separates expansion from contraction). Non-oil activity in Abu Dhabi is improving after a challenging two years during which deep government spending cuts slowed activity. Key projects, such as the construction of nuclear plants and airport expansion, are progressing, albeit with delays, the IIF economist explained.

He said the impact of the current standoff with Qatar is expected to have a limited impact on growth.  

"To achieve and sustain higher growth over the medium term, a comprehensive strategy is being prepared that aims to encourage foreign direct investment outside free zones and the energy sector and expand non-bank and capital market financing options for SMEs, which would boost private sector growth and promote diversification."

While inflation will remain subdued as the continued decline in rents offsets higher imports prices, inflationary pressures from the introduction of VAT early next year will be partly offset by further declines in rents, Iradian argued.

The IIF said banks in the UAE are well-regulated and supervised and continue to weather the effects of low oil prices and the moderation in non-oil economic activity. "We expect annual credit growth to recover from 1.7 per cent at end-2017 to about five per cent in 2018."

The IIF said ongoing UAE reforms to develop the domestic capital markets would increase financing and saving options in the economy.

"We do not expect a change in the exchange rate regime in the short-term. The flexibility of the labour market combined with implementation of structural reforms would improve competitiveness without the need for currency adjustment."

- issacjohn@khaleejtimes.com