Economic Overview

The UAE remains one of the most resilient economies in the region, supported by its diversified economy and a strong foreign exchange reserve position.

Throughout 2018, the economy benefitted both from a rise in oil prices and the Government’s proactive fiscal strategy. This important series of structural reform initiatives will help the economy by creating an environment for sustainable growth.

This year, increased Government spending helped to support growth, strengthen competitiveness and ease the burden on corporates seeking to reduce costs and increase efficiencies for their businesses in an increasingly competitive market.

The introduction of VAT in January 2018 was a vital component of the fiscal reform strategy, which will help to diversify government revenue and support fiscal sustainability, generating additional revenue to support future investment.

The inflation rate has remained soft, reflecting a number of headwinds facing the economy, such as the correction in the real estate market and the weak domestic demand. The strength of the US dollar helped to contain imported inflation but has impacted the competitiveness of key non-oil sectors externally, often resulting in price discounting, and squeezing margins still further.

Nevertheless, the non-oil sector, which accounts for almost 70% of the UAE’s GDP, has seen measured growth in 2018.

INVESTMENT ACTIVITY

The sector continues to be driven by key government objectives and the strengthening of investment activity across the year, primarily driven by the lead up to Expo 2020 in Dubai.

Project awards also gathered momentum in 2018 and Abu Dhabi, in particular, felt the positive effects of this revival. Major projects, such as the upgrade to the Ruwais Refinery and the development of offshore fields, have helped to drive this increase and laid the foundations for robust investment growth.

We expect this momentum to continue throughout 2019. As well as the construction projects linked to Expo 2020, Abu Dhabi will benefit from Abu Dhabi National Oil Company’s (ADNOC) plans to invest in developing both upstream and downstream operations over the next five years. This is set to fuel additional related project awards to support this growth.

CONSUMER CONFIDENCE

Consumer confidence remained muted with demand for retail credit weakening. Higher prices, combined with continuing uncertainty in the labour market, prompted consumers to take a more disciplined approach to day-to-day spending and to keep a careful watch on their wallets.

The hospitality, real estate and retail markets were impacted as a result of soft demand and rising supply. Oversupply in these sectors has resulted in the decline of property prices and rental yields, impacting demand. Both domestic and international demand remained weak and real estate prices contracted. There was a more significant fall in property sale prices in Dubai than in rental rates, but both seem set on a downward trend.

Tourism remained resilient, though the pace of growth moderated as the boost from the earlier visa liberalisation faded.

BANKING SECTOR LIQUIDITY

Banking sector liquidity remained ample as the loan-to-deposit ratio declined to a four-year low, reflecting the outpacing of deposit growth to credit growth. The key driver for this liquidity was higher Government deposits, which reached a multi-year high in 2018 as the price of oil increased. Government related entities (GREs) also helped to strengthen total net deposits to underpin liquidity across the sector.

This liquidity is helping to limit the positive spread between the EIBOR and LIBOR rates from historical levels, though they have widened from the small differential seen in early 2018. Meanwhile, the UAE Central Bank continued to raise benchmark rates in line with the US Federal Reserve.

LOOKING AHEAD

We expect the Government’s proactive fiscal policy to remain a decisive factor in 2019, continuing to drive growth in the region and serving to reinvigorate the economy through direct spending measures to boost competitiveness and a pipeline of large-scale infrastructure projects.

Meanwhile, a number of domestic and international pressures are likely to continue and remain challenging. The lower oil price forecast for 2019 will result in the reduction of export income, and we see external risks rising with factors such as the trade tensions between the US and China and the forecast slowdown in global growth. Nevertheless, we expect the UAE’s fundamental position to remain strong.

The steady strength of the dollar, coupled with the slowing pace of global growth and a continuing contraction of the domestic housing market, look set to be key challenges for the economy.

Any softening in the global growth outlook is also expected to be a challenge to the trade and logistics sectors in the UAE given its role as a worldwide transhipment hub. Nevertheless, the economy is well- positioned to weather any headwinds it may face as it continues to regain its strength.