Economic Growth in UAE Not Expected to be Underpinned by Oil in 2018

A new country and sector risks report from Coface suggests that economic growth in UAE throughout 2018 will be underpinned by global tourism and household spending rather than the oil sector. The report predicts the UAE will experience GDP growth of 3.8% this year, up from 2% last year and 2.7% in 2016.

Furthermore, Coface acknowledges the UAE government’s more stringent fiscal approach, including the removal of fuel subsidies and increasing tariffs for electricity and water. It states that this, along with the modest recovery in oil prices, will lead the country’s budget deficit “to narrow”. Such positive reports are some of the important forex signals that financial investors look for when choosing currency pairs to trade. The UAE dirham (AED) has remained robust against the US dollar in recent months, despite almost daily gains in the US stock market prior to the unforeseen sell-off on the US exchanges earlier this month.

The Coface report states that “appreciation of the US dollar” in the event of US Federal Reserve interest rate increases would also allow the dirham to “appreciate” as it is “pegged to the US dollar”. The data also mentions increases in non-oil exports from UAE, due to rising global trade volume and tourism revenues, which is also expected to ease the UAE’s existing budget deficit.

These growth figures compare favorably with neighboring Saudi Arabia, whose GDP growth is only expected to reach 1.2% by the end of the year. However, this is good news for the Middle East as a whole, after the nation experienced negative GDP growth of -0.5% in 2017.

The Emirates NBD UAE Purchasing Managers’ Index (PMI) revealed last month that employment throughout the UAE grew at its strongest pace for more than a year in January, on the back of increased workloads within non-oil sectors. That’s despite the UAE government’s ground-breaking introduction of VAT increasing business’ input costs as a result.

UAE-based banks are also anticipating a fruitful 2018, with higher loan growth and profitability due to the improving national economy. Slowly rising interest rates will also provide a much-needed boost to banks’ net interest margins. Emirates NBD, the capital’s largest financial lender, reported a 17% increase in profits during Q4 2017, aided by the growth in interest rates. The Central Bank of the UAE increased interest rates to 1.75% late last year, following the announcement of a similar rate increase by the US Federal Reserve.

The United Nations Council for Trade and Development (UNCTAD) and the Investment Promotion Agency (IPA) Observer ranked the UAE as the 13th most promising national economy for investment between now and 2019, reflecting favorably on the country’s liberal and investment-friendly business policies. The UAE government is readying plans to allow greater foreign ownership in UAE-based organizations operating in key sectors, generating a more positive inflow of overseas investment across the country.

Certainly, with UAE businesses already showing positive signs of being able to absorb VAT costs resulting in a rate of job creation last month that was the fastest since last January, the signs are encouraging for the UAE to simultaneously improve its fiscal position at home and its standing for doing business worldwide.