The United Arab Emirates 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, the Journal of International Affairs states.
Let’s check the analysis by its author Robert Mogielnicki. He’s a Resident Scholar at the Arab Gulf States Institute in Washington, where he manages the institute’s political economy research. He previously worked as a human resource development consultant and in journalism across the Middle East, and he holds a D.Phil degree from the University of Oxford’s Magdalen College.
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 United Arab Emirates (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.
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 percent 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 percent in Dubai and 5 percent in Abu Dhabi over 2020 are much steeper than the GCC average of 4 percent. The Dubai Statistics Center refutes these figures, citing a population growth of 1.6 percent 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.