Economic activity outside the oil sector is showing signs of a recovery and banking sector liquidity is comfortable. Additionally, the government has acted early to introduce fiscal reform and tentatively broaden tax revenues away from hydrocarbons. The introduction of 5% VAT from 1 January 2018 is also a significant move to deepen tax revenue. However, this is likely to have an impact on spending in 2018.
The business environment experienced a gradual improvement throughout 2017. Investment activity gained momentum driven by an increase in project activity, particularly in Dubai, while the recovering global economy fuelled an increase in trade flows and service exports.
A steady rise in the price of oil has also brightened the economic picture, although it seems unlikely that it will match the historic levels of the past anytime soon.
In general, weakness in the regional economy was partly offset by a pronounced pickup in global growth in 2017 which served to support the UAE. As a major trading centre, the UAE has benefitted from rising trade volumes, experiencing solid growth in the volume of goods coming through its ports throughout the year.
A rising number of tourist visits also supported external growth and tourism-related sectors provided a welcome revenue boost. The significant rise was triggered by a relaxation in visa regulations for Chinese and Russian tourists, and for Indians with US or Eurozone visas.
Investment activity across the UAE gained solid traction during 2017 and is expected to play an even stronger role in the non-oil sector this year.
We saw robust growth in project awards — and activity — in 2017. Infrastructure projects related to Expo 2020, direct and indirect, alongside construction, power and transportation, featured heavily in Dubai. In 2017, more than AED 10 billion direct Expo-related projects were awarded.
There was also a surge of project awards in Abu Dhabi, particularly towards the year end. Plans to increase oil, petrochemical and gas capacity are behind the major projects.
The ongoing measures to diversify and broaden the economy, a focus on fiscal reform and a strong foreign exchange reserve position will all act to support a growing economy in the UAE.
While there is much to be positive about, some economic headwinds persist. Weak regional demand, the still relatively strong dollar and continuing concerns about job security have all played a part in dampening consumer appetite. This resulted in many corporates, particularly in hospitality and retail, cutting prices to bolster demand, thereby impacting their margins. Consequently, private sector credit growth remained soft in both the corporate and consumer sectors.
Deposit growth outpaced credit growth across the year, resulting in a lower loan-to-deposit ratio compared to 2016. As a result, interbank rates did not fully follow the 75 bps rise in the US Federal Funds rate and the rise in the UAE repo rate. The easing in banking sector liquidity conditions was also reflected in the narrowing in spreads between UAE and US benchmark rates.
While the overall data continues to highlight the weak credit demand environment, the main drivers of deposit growth in 2017 were the government and the GRE (Government Related Entities) sectors.
We expect liquidity to remain comfortable in 2018 on the back of a higher oil price, further international debt issuance and a contained acceleration in credit growth. We see further traction building in the UAE’s investment programme in 2018, which should support a gradual pick-up in credit growth, though potential headwinds remain.
We expect investment to be the central driver of improving non-oil GDP growth in 2018, as economic activity builds ahead of Expo 2020, and as the implementation of hydrocarbon sector projects in Abu Dhabi progresses.
A further strengthening of the global economy and trade volumes will also support the UAE’s economic activity in 2018.
The introduction of VAT from 1 January 2018 is likely to raise taxes of around 1.5% of GDP in its first full year, realising a balanced fiscal position in 2018 with higher government revenue despite a pick-up in government spending.
However, this is likely to result in dampening of consumer spending and a lift in inflation. Some corporates might have to initially absorb part of the VAT given the impact on demand.
The ongoing measures to diversify and broaden the economy; a focus on fiscal reform, and a strong foreign exchange reserve position will continue to underpin the UAE’s strong fundamentals.
We remain positive on the outlook of the UAE economy.
