The UAE remains well-positioned within the GCC, offering a stable and diversified economy with strong macroeconomic fundamentals, clear leadership vision and a focus on economic development.
2016 was a challenging year, marked by a low oil price environment combined with soft regional and global demand, which impacted the UAE economy. However, even with the weakening of overall economic activity, the UAE continued its investment in core projects.
In a welcome development, the price of oil finally showed signs of picking back up toward the end of 2016, following the OPEC and non-OPEC agreement. While the announcement boosted the oil price above USD50 p/b, uncertainties remain over the implementation of the deal. We remain conservative in our forecasts for average oil price in the near term.
The low oil price environment has been accompanied by fiscal reform in Abu Dhabi, a pull back in government spending across the wider region and restructuring in government-related entities (GREs) and other businesses looking to become leaner and more efficient.
In the interest of fiscal sustainability, Abu Dhabi has been proactive in reforms to reduce the size of its deficit. This has contributed to the softness in domestic demand.
A weak global backdrop also had an impact, with a strengthening US dollar affecting competitiveness. A rise in USD and subsequent appreciation in the AED have been key factors behind weaker external demand, impacting core non-oil sectors such as transportation, hospitality, real estate and retail.
Many corporates have responded to the slowdown by focusing on cost-cutting, including job cuts, thereby adding further softness to the domestic demand environment.
Over the medium term, the non-oil sector accounted for 65% of the UAE’s GDP. Whilst lower oil prices have led to a more cautious spending approach by the Government and the private sector, core sectors of the UAE economy, including tourism, leisure facilities, transportation and logistics continue to see growth. We see an ongoing broadening of the leisure industry, with continuing investment in both family-related theme parks and business-related conference tourism.
Technology is a new area that the UAE is focusing on, as further diversification away from oil as well as from tourism and retail development.
We expect the UAE economic activity to strengthen in 2017 on stronger Dubai investment, with investment spending budgeted to accelerate by 27% as Dubai Expo 2020 approaches. The 2020 event marks the first time that this global mega-economic expo will be held in a country in the Middle East, North Africa or South Asia.
Despite the low oil price, we saw a more moderate contraction in project awards during 2016, down 8% year on year compared to 16% in 2015. Key construction project awards in 2016 included Yas West Residential; hotel projects in Dubai including expansion of Atlantis; Dubai Library, and Mohammed bin Zayed City Fujairah. Key transportation projects include the Dubai Metro Red Line Extension Route 2020, and Musanada Capital District and related road infrastructure. A significant number of construction projects are expected to be awarded in 2017.
Meanwhile, we forecast that the UAE’s annual average inflation rate will accelerate to 2.8% in 2017, up from 1.7% in 2016, driven in part by higher gasoline prices. As the UAE’s fuel prices have been liberalised (since August 2015), global oil developments will now be reflected in domestic prices.
Total credit growth has moderated in 2016, in line with the weakening economic backdrop, albeit still outstripping deposit growth for most of 2016. This resulted in a further tightening in banking sector liquidity conditions, which pushed interbank rates higher in 2016. Government and GREs combined were net creditors from the banking sector in 2016, particularly with a pickup in GRE borrowing and lower deposits in the banking system compared to 2015.
The financial sector’s fundamentals remain solid. For the most part, UAE banks are strongly capitalised and equipped to deal with this lingering slowdown in economic activity.
We maintain a strong belief in the UAE economy and its future. Even with the current economic environment and its evolution, there are still strong underlying fundamentals at play. Whilst the UAE’s economy faces headwinds, it is well-positioned to address the current challenges and poised for strong and sustained growth over the medium and long term. For these reasons, focusing on the UAE remains a key strategic pillar for ADCB.