The United Arab Emirates, like the rest of the world, is re-imagining its economy post-COVID. What might the UAE economy look like once Gulf countries turn a corner? Increasingly diverse is the answer.
Let’s check a few predictions of UAE’s economic development in 2021+. And the first comes from ICAEW authors.
The UAE economy depends heavily on both the flow of international trade and migration. The global pandemic has clearly not helped.
The economy itself is based on three main elements: oil, a migrant-based labor force, and trade. It’s notorious for being a center of excellence for trade within the region, and it is generally accepted that it connects the east and west as a business hub.
Mazen Houalla, Partner in KPMG Lower Gulf, focuses on the Public Sector in the UAE. His focus is on transformation strategy, project management, and performance excellence.
Houalla points out that COVID restrictions vary from one Emirate to another. Dubai took precautions back in March/April, 2020 with complete lockdown – everything now is back open. By contrast, entry into the Emirate of Abu Dhabi is impossible without a valid PCR (COVID-19) test, showing you have not contracted the virus, within the last 48 hours.
The tourism sector has been severely impacted in the UAE. “Closed airports and canceled flights have had a major impact on the number of people coming in, whether for business or for leisure and tourism,” says Houalla. “Tourism was a key reason for the government’s decision to open the airports and give assurance to the global community that it is taking robust measures to ensure facilities are being sanitized to high standards.”
The UAE’s two major international airlines – Etihad and Emirates – are now seeking efficiencies and, says Houalla, are looking to their partnerships with low-cost airlines to accommodate the reduced demand. There is also a shift towards cargo operations for obvious reasons.
The UAE’s modern economy has been built off the back of its infrastructure projects. It has taken heavy investment for the UAE to become a leader in the region and now neighboring countries are adopting a similar model but, points out Houalla, the UAE was the pioneer.
The author points out that, regrettably, canceled events, restricted trading, and closed airspace do not convey the message to the international community that the UAE is open for business – a message it has worked hard to craft over the last three decades.
However, the UAE is unlikely to sit back. The UAE has traditionally been awash with government initiatives that have built its economy, including free zones, start-up support, investment incentives, and the enablement of inward investment. Consequently, and unlike other countries in the region, more than 98% of the total number of companies operating in the UAE contribute 52% of non-oil GDP. This 98% represents the SME sector. Yes, a staggering 98% of all businesses operating in the UAE are SMEs.
This is a clear demonstration of how important the start-up scene, government support and technology are to the future of the UAE economy. Nevertheless, it will not be immune to global economic shock.
That is why the UAE is nurturing its economy through diversification. Infrastructure, education, healthcare, renewable energy – these are all sectors that are all on its list. “Following the pandemic, I think there will be more focus on opportunities for diversification,” says Houalla. “We need to be laser sharp about what sort of industries the UAE needs to focus on, especially if this pandemic continues. Diversification should present an opportunity for the UAE to flourish in the region in particular.”
Of course, COVID will slow down business and investment decisions but there is still much thinking to be done and action to be taken. For example, does the UAE have the right talent to fulfill its future ambitions or, to recover and achieve its diversification plans fully, does it need to act around education?
“There has been an emphasis on the quality of higher education,” confirms Houalla. “Not just on elevating the quality of the teaching but also moving in a different direction. There is a new focus on research and less so on teaching. This is a complete shift for the UAE.”
He continues: “We are also rethinking supply chains and reducing dependency on Chinese manufacturing. We are encouraging the setting up of a good network of manufacturers when establishing a business in the UAE. This goes back to the diversification strategy.”
Houalla points out that there have been increased requests for collaboration and partnership with the UAE – the country is moving on from the old-fashioned model of simply importing and exporting.
But, he says, further diversification is needed, not just in terms of sectors but also an investment. The opening up of trade with the State of Israel is a case in point. “I think this will have a very positive impact in terms of the inflow of investment and opportunities. It is an example of measures that need to be taken in challenging times,” says Houalla.
Importantly, he says, the slowdown and the diversification strategy will present opportunities for local talent, especially relating to the jobs of the future. These are bound to be significantly focused on digital.
The United Arab Emirates’ Post-COVID-19 Outlook
Robert Mogielnicki in the article for the Journal of International Affairs states that the UAE faces tough economic challenges in 2021 and beyond. The coronavirus and the resulting crises have caused its most important industries to struggle, endangered retaining its expatriate residents, and obstructed global investments. Nevertheless, its economic pillars allow it to enjoy a position of strength while battling for regional economic influence and pursue a sound economic recovery.
As hopes for a swift economic rebound and transition to a post-coronavirus world faded, governments across the Middle East and North Africa buckled down for another challenging year in 2021. The UAE remains in a strong position to weather the ongoing economic storm caused by the coronavirus and interrelated crises, especially when compared against neighboring Gulf Cooperation Council (GCC) member states. However, managing these extraordinary shocks amid heightened regional competition will take a significant toll on the country’s economy.
Strong Economic Pillars
The UAE possesses one of the region’s most diversified economies, especially outside of the hydrocarbon-abundant emirate of Abu Dhabi. In 2018, the share of hydrocarbon revenues as a proportion of the UAE’s total revenues reached 36 percent. By contrast, hydrocarbon revenues constituted 68 percent or more of total government revenues in the remaining GCC countries during the same year. Diversified government revenue streams offer the UAE a degree of flexibility to manage volatile periods in global energy markets, such as the oil price rout of early 2020 that resulted from the coronavirus.
The UAE also possesses a small national citizenry, representing approximately 10 percent of its total residents and substantial sovereign wealth holdings. Abu Dhabi alone manages around $1 trillion in sovereign wealth capital. This socioeconomic combination makes it easier to meet the state’s distributive responsibilities and push through needed economic reforms.
Compared to neighboring Gulf Arab states, the UAE was an early adopter of technology-led development strategies and continues to encourage the growth of innovative industries. Many UAE-based firms operating in financial technologies, e-commerce, new media, and e-sports and gaming have been positively impacted by global measures intended to curb the coronavirus pandemic. Many established multinational firms and more recent startups consider the UAE to be the region’s premier business hub. Several emirates, dozens of free-trade zones, government-sponsored startup accelerators, and other types of business communities can cater to just about any firm. Moreover, the UAE’s reputation as a regional hub means that it is most likely to benefit from any consolidation of private firms with business interests in the Middle East during economic downturns.
The UAE’s economic and public health responses to the coronavirus pandemic have been swift and organized. UAE’s central bank launched a $26 billion economic stimulus package. Abu Dhabi rapidly unveiled its coronavirus stimulus package in March 2020 as part of Ghadan 21 – a $13.6 billion investment program launched in 2019. In January 2021, Dubai launched its fifth stimulus package, which brought the total coronavirus-related business incentives to $1.93 billion. The country also has a well-respected healthcare industry and currently enjoys among the highest coronavirus vaccination rates in the world alongside Israel.
Looming Uncertainties
The UAE nevertheless faces an array of economic challenges in 2021 and beyond. The country’s non-oil economy is heavily reliant upon industries impacted by the coronavirus, such as aviation, tourism and hospitality, and logistics. Aviation and tourism account for an estimated 13 % of the gross domestic product in the UAE. Despite having made progress in economic diversification on a countrywide level, emirate-level economies are still heavily dependent upon a handful of key industries. Thus, the fallout from poorly performing industries often cuts deep into the balance sheets of specific emirates rather than being evenly distributed across the country. Dubai’s aviation sector was expected to grow from about 27 percent of GDP in 2013 to 37.5 percent by 2020. Any future drops in oil prices akin to 2014-15 or early 2020 will hamper Abu Dhabi’s finances.
The UAE may encounter trouble retaining expatriate residents. According to S&P Global Ratings, estimated population contractions of 8.4 % in Dubai and 5 % in Abu Dhabi over 2020 are much steeper than the GCC average of 4 %. The Dubai Statistics Center refutes these figures, citing a population growth of 1.6 % instead. Whatever the precise population figures may be, there is increasing pressure on UAE authorities to prevent a permanent exodus of expatriates. Emirati policymakers have responded with new visa schemes and even a pathway to citizenship to retain and attract talented expatriates.
The Dubai Expo, which was initially planned for October 2020 but delayed until October 2021, was expected to bring an economic windfall for the UAE. The current hope is that the event will function as a platform for recovery. However, according to the real estate consultancy Frank Knight, visitors to the expo are unlikely to meet the pre-pandemic target of 25 million. The emergence of coronavirus variants and slow vaccination progress in many countries across the globe will make it extremely difficult for organizers to pull off a commercially viable event.
Uncertainties related to the Dubai Expo event and expatriate residents have exacerbated longstanding concerns about commercial and residential real estate oversupply in the country. In December 2020, Dubai’s largest developer temporarily halted new developments because of the property glut.
Strained finances also impact debt dynamics. According to Oxford Economics estimates, Dubai’s total public debt stands at around $153 billion or 140 percent of GDP. This figure includes $89 billion of debt held by government-related entities. However, Dubai’s less pessimistic bond prospectus revealed $33.6 billion, 28 percent of GDP, in outstanding direct government debt, but government-related entities’ precise debt obligations remain unclear.
Regional Dynamics and Competition
The announcement of a normalization agreement between the UAE and Israel in 2020 prompted a series of commercial agreements and economic partnerships. However, not all of these commercial initiatives will flourish, and even the most promising partnerships will ultimately take time to yield economic gains. Ongoing Gulf reconciliation efforts following from the AlUla Declaration, which effectively ended a three-year economic and diplomatic boycott on Qatar, will positively impact re-export hubs in the UAE and narrow segments of the economy, such as retail subindustries. Yet, not all of the trade and investment flows dried up after the 2017 Gulf rift will return.
The UAE also confronts growing competition from economic development strategies in neighboring countries. Since the start of the 2017 Gulf rift, Qatar has accelerated the development of a new media city and free zones that incorporate high-potential technologies, which may eventually compete with media and logistics clusters in the UAE. Meanwhile, Saudi Arabia’s ambitious economic transformation agenda continues to steam ahead. Saudi policymakers announced that foreign firms seeking to do business with the government must have regional headquarters in the country by 2024. The decision may lure some multinational firms away from the UAE. Saudi efforts to develop its domestic tourism sector may also negatively impact the UAE’s tourism and hospitality sector.
A Position of Strength
The coronavirus pandemic and oil price rout of 2020 shook the UAE’s economic foundations and exposed pre-existing cracks. Moreover, heightened competition with neighboring states threatens the UAE’s slice of the region’s total economic pie. Yet, for the time being, the country continues to jockey for economic influence and nurture an economic recovery from a position of relative strength due to its relatively diversified economy, flexible fiscal policy options, and swift and competent response to the pandemic.
A blessing in disguise: UAE’s possible scenarios
The UAE is further positioning to better take the advantage of globalization, including the increasingly globalized capital, labor, and technology, the interconnectivity and dependence of globalization also means the country will share in the impact of the global COVID-19 pandemic. Let’s check Reem Alshamsi conclusions about the role of the country in the post-COVID world.
While the UAE, as with other countries, is yet to fully assess the human and economic costs of the new COVID-19 pandemic, the emerging consensus is that public health measures to contain the novel virus will have a significant impact on the global economy. For example, the updated International Monetary Fund’s (IMF) World Economic Outlook (June 2020), predicts a deeper recession in global economic activities larger than the 2008/2009 global financial crisis (IMF, 2020).
On the mechanism through which the pandemic will affect the global economy, early assessment, particularly on globalization metrics, suggests up to 40% hit to foreign direct investment (FDI) in 2020-21, up to 32% drop in international trade in 2020, and up to 63% drop on International passenger traffic (UNCTAD, 2020; WTO, 2020; ICAO, 2020). Therefore, with regards to the UAE’s economy, which depends heavily on both the flow of international trade and migration, there is a need to postulate on how the country can respond to, and move beyond, this global pandemic. This is because the UAE, with its oil-based economy and migrant-based labor force, is particularly exposed to the emerging economic impact of this pandemic. Therefore, this article provides possible scenarios that the UAE may consider if it chooses to explore the changes to the structure of the economy in a post-COVID-19 pandemic world.
The COVID-19 pandemic and the global economy
The COVID-19 pandemic models, produced by national public health agencies and other infectious disease experts, painted a stack picture of dreadful infection and death rates of the novel coronavirus will have on the human population across the world, and formed the basis for governments around the world to adopt strict lockdown measures, leading to the extensive shutdown of economic activities (Azman and Luquero, 2020; Chang et al., 2020; Chowdhury et al., 2020 Giordano et al., 2020; Weitz et al., 2020; Chintalapudi et al., 2020; Ray et al., 2020).
The early analysis points to a significant contraction in the global economy, with international trade plummeting, business investments withheld as consumer confidence plummeted, and the stock market in a meltdown as investors assess the extent of damage the pandemic will have to business profitability (Zhang et al., 2020; Baker et al., 2020).
The latest IMF’s World Economic Outlook, June 2020, concludes that the global economy will experience the “worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago” (IMF, 2020). The central forecast of the impact of the COVID-19 pandemic is that the decline in global economic activities will result in a negative growth rate of global GDP of 4.9%, which is a sharp increase from its April 2020 forecast of a negative 3.0%. The OECD’s forecast is even more stack; predicting global economic growth will contract by 6% in 2020, even in a scenario where the pandemic is short-lived in a single wave.
Public health measures introduced by most countries and termed the “Great Lockdown” by the IMF, is expected to cause unprecedented economic crises, with an uncertain recovery in both developed and developing countries. The G7 countries, for example, are expected to experience contraction in real GDP between – 7.8% to -12.8% (Canada by -8.4%, France by -12.5, Germany by -7.8%, Italy by -12.8%, Japan by -5.8%, the United Kingdom by -10.2, and the United States by -8.0%) (IMF, 2020).
The trajectory of the COVID-19 pandemic in the emerging and oil-based economies, such as the UAE, is yet to be fully assessed, but the current forecast suggests a sharp decline in economic activities. The UAE’s economy is projected to suffer a sharp decline in economic activities but performs relatively better than most Gulf Cooperation Council (GCC) countries. Measured by real GDP, the UAE’s economy is expected to contract by -3.5% in 2020. Comparatively, Saudi Arabia real GDP is expected to fall by -6.8%, Bahrain -3.6%, Kuwait -1.1%, Oman -2.8%, Qatar -4.3% (IMF, 2020).
Potential scenarios facing the UAE
Having highlighted the effects of the COVID-19 pandemic on the global economy and the UAE, there is a need to postulate on potential scenarios facing the UAE during (without vaccine) and even post-COVID-19 world (if the world is lucky with an effective vaccine).
This article explores four possible scenarios as future structure and growth pathways for UAE in the post-COVID-19 pandemic. In the first scenario, the UAE attempts to tackle this economic crisis using similar tools as it did for the 2008/2009 crisis, effectively keeping the current model intact. The other three scenarios assume the impact of the pandemic will be stronger, with the global economy struggling to recover to pre-COVID-19levels and the current UAE economic model exposes it to higher risks from shocks to oil prices, the decline in global production capacity, and international migration. These scenarios, therefore, explore the possibility of changes to the economic structure of the UAE.
Scenario one: wither the storm
The current consensus is that the COVID-19 pandemic will have a devastating impact on the global economy, especially on global oil prices, international trade, FDI, and international migration. The impact is expected to hit the UAE economy, given the structure of its economy that relies on strong oil price and demand as well as migrant labor to sustain its economic activities.
Both Abu Dhabi and Dubai, the two economically dominant Emirates, are particularly at risk, albeit at different degrees and with different capacities to deal with any financial fallout of the pandemic. A review of Dubai’s 2009 debt crisis, when it could not meet repayments of its debt, means that the Emirate is in an even much worse situation to deal with any future financial crises that may be induced by the COVID-19 pandemic. This is because Dubai’s sovereign debt — separate from its SOEs debt, which is a huge burden on its own — is equivalent to 110% of GDP in 2019, according to the IMF, placing it among the highest debt-to-GDP ratios in the world (IMF, 2020c). On the other hand, while Abu Dhabi faces its own fiscal pressures from falling oil prices and demand, but its massive sovereign wealth fund (SWF), estimated at over $800 billion (Parasie, 2020), suggests that Abu Dhabi is in a better position to withstand moderate to severe economic impact from the pandemic.
However, the postponement of the much-anticipated EXPO 2020 Dubai, mounting sovereign and state-owned enterprises (SOEs) debt, and dwindling housing market means that the economic impact of the pandemic in Dubai Emirate may yet get worse, thereby affecting the economic prospect of the UAE as a whole. This scenario assumes that Abu Dhabi, using its large SWF, will most likely intervene to protect the economic stability of the United Arab Emirates.
Scenario two: diversification and expansion import-substitution industries
This scenario assumes the pandemic may have a larger impact on the global economy resulting in even slow recovery over a decade or more. In this case, the impact on both the global oil and tourism industries will also be stronger than currently projected. Therefore, well-diversified energy and non-energy industries may provide the necessary portfolio of products to hedge against the risks associated with reliance on the core oil trade. UAE is already on the path to diversification, with significant investments into sectors such as infrastructure, education, healthcare, and renewable energy.
However, there are three reasons why this scenario assumes the COVID-19 pandemic may provide opportunities to consider changing the structure of the UAE’s economy through further diversification and a move towards import substitution industries.
First, in the event of the slow recovery of the global economy, or if the economies transition to greener alternatives of renewable and clean energy, the outcome will likely be a sustained decline in global demand for oil, which will continue to have adverse effects on the government revenue as a significant part it comes from the oil sector. Second, if the COVID-19pandemic continues to spread through multiple waves, it will have a substantial impact on the tourism and hospitality industry, which will also affect the government revenue. Third, this pandemic has shown that import-dependent countries can be severely affected through disruption in international trade, where the supply of essential goods may be limited or available at higher prices.
Scenario three: UAE as GCC and MENA regional supply chain leader
Undesirably, rather than respond to the call for international cooperation in dealing with the health and economic challenges posed by the COVID-19pandemic, countries, instead, retreat to nationalistic and protectionist policies to protect their citizens. The barriers to international trade, such as export controls and closure of businesses, introduced by countries as they respond to the pandemic, raises the question of whether the current globalized economic order is coming to an end or fundamentally reshaped, with changes such regional supply chains emerging as countries attempt to reduce their dependencies on Chinese manufacturing.
The rising need for nationalistic and protectionist policies may grow even stronger without a vaccine to control this deadly novel coronavirus. However, the UAE, as an emerging hub for international trade, with 37 free trade zones and additional zones in construction, UAE can take advantage of weakening international trade cooperation and position itself as a champion of free trade, especially at the regional level. According to the World Economic Forum, the UAE had improved to become the 25th globally in the 2019 Global Competitiveness Report and continues to maintain its position as the most competitive economy in the Middle East and North Africa (World Economic Forum, 2019). This puts the UAE in position to seek to position itself as the leader of the supply chain for GCC and MENA Regional
Scenario four: Emiratisation of labor through the growth of the digital economy
The COVID-19 pandemic offers the UAE an opportunity to re-strategize its Emiratization policy. Two of the indicators for measuring the outcome of the UAE Vision 2021 National Agenda are the share of UAE nationals employed in the private sector, and the share of employed UAE nationals in the total workforce. However, only 3.64% of workers in the private sector are UAE nationals while just 7.62% of the total workforce is UAE nationals.
In the face of disruptions to international migration that may emerge from the COVID-19 pandemic, there is a need to consider a scenario where the supply of foreign labor may be interrupted, with a negative impact on economies that rely heavily on foreign labor. Alternatively, such countries may seize the opportunity to prepare and encourage its unemployed citizens for future job opportunities. But the challenge for the UAE, as with other foreign labor-based economies, is that the nationals are often less interested in private sector jobs, instead of seeking more lucrative but limited job opportunities in the public sector.
Consequently, this scenario, the Emiratisation of labour through the growth of the digital economy, offers triple benefits to the UAE: creating a knowledge-based economy, high paying job roles for the national, and broader source of revenue for the government. For this scenario, the core of the digital economy should be about encouraging investment in technological hubs and attracting foreign investment into technology-based businesses. For example, research by Accenture in 2018 predicted investments in artificial intelligence (AI) could result in a 1.6% increase in the UAE’s economy and add $182 billion to its economy by 2035 (Accenture, 2018).
Fortunately, the UAE already has a plan to leverage on for this scenario. In September 2017, the UAE Government launched the UAE Strategy for the Fourth Industrial Revolution (4IR), for the purpose of expanding the economy through advancing innovation and future technologies (UAE, 2020c)
Conclusion
The UAE has made great progress in meeting its Vision 2021 National Agenda, especially in the areas of education, health, infrastructure, and competitive economy. However, the current COVID-19 pandemic is threatening to halt, or even reverse, the gains of the last decade. As the post-COVID-19 pandemic debate continues, especially with respect to the role of globalization, a scenario-based analysis of the potential future path for the UAE can offer an important contribution to the debate, especially on the problems and opportunities the pandemic presents.
The scenarios discussed depend on the nature and duration of recovery in the global economies from the devastating impact of the COVID-19 pandemic, and the extent to which the principles of globalization are maintained. For example, if countries retreat to nationalistic and protectionist policies, it will have adverse on the UAE’s economy, though its impact on foreign investment, trade, and migration. On the other hand, it will also create opportunities for the UAE’s economy, especially on the potential changes to the structure of the economy. Finally, the focus of these scenarios is particularly relevant for the new UAE Centennial 2071, which aims at investing in the future generations, by preparing them with the skills and knowledge needed to face rapid changes, as the UAE considers its strategies for a post-COVID-19 pandemic.
