United Arab Emirates

Growth at all costs - a calculated gambit?

Strengths & weaknesses

Economic overview

An oasis of growth in a troubled region?

The UAE economy grew by around +3% in 2023, thanks to moderately favorable hydrocarbon prices, higher revenues from tourism and continuous growth in the real estate and construction sectors at large.

Resurgent energy demand following the pandemic, along with a steep spike in international oil prices, led to a rapid increase in oil output and exports in 2022, fueling rapid development in the non-oil economy alongside the full reopening of non-oil industries such as tourism. The latter, along with real estate and logistics, has risen significantly after the pandemic. These trends have continued into 2023, with occupancy rates of hotel rooms in Dubai exceeding 90% and partially offsetting the fact that oil demand growth slowed down and OPEC+ set stricter production quotas.

Consumer demand remains robust as federal and emirate governments spend extensively on capital programs and resident assistance to alleviate cost-of-living constraints. Government efforts such as easing residency rules for foreign nationals, inflation-relief initiatives and private-sector support are driving economic prospects.

Contingent liabilities remain a concern but fiscal stability is progressing

In recent years, a business-oriented approach has led the way to weaning the economy off oil rent and expanding services. Expat attraction and foreign investment policies are key to consolidating the construction sector, which continues to account for nearly 20% of bank lending as well as services. Construction kept rising in the first three quarters of 2023, with real estate activities also increasing at a slower pace. Together, these two industries accounted for 13% of the UAE's GDP in 2022. Property prices have seen a significant rise only in the past two years, following a lengthy period of rebalancing as the housing stock moved toward equilibrium. In 2021, the UAE's largest construction company filed for bankruptcy and was liquidated, indicating some imbalances in such a flamboyant sector. Since the bankruptcy law went into effect at the end of 2016, government-related firms, including construction conglomerates, special-purpose vehicles and developers, have increasingly entered official restructuring and liquidation processes. Costs for contractors and project developers are rising again because of increasing loan rates and this trend is expected to slow the market temporarily despite the presence of many cash buyers.

Fiscal stability is also progressing. In September, Dubai began repaying a USD20bn bailout loan from Abu Dhabi and the country's central bank as part of an effort to reduce its debt burden, almost 15 years after the sheikhdom teetered on the brink of default.

Abu Dhabi remains the UAE federation's primary financial backer, although support should not be taken for granted. Over the last decade, Abu Dhabi's contribution to the UAE federal government has averaged 13% of the emirate's GDP (8% of UAE GDP), or more than 35% of Abu Dhabi's government spending, in the form of direct donations and spending on behalf of the UAE federal government.

The cost of playing the field

The UAE is a young federation with a history dating back to 1971-1972 and faces typical succession dynamics that may raise concerns despite a general sense of stability perceived by foreign investors. In April 2023, President Mohammed bin Zayed nominated his eldest son Khaled as crown prince, ending the kingdom's succession dilemma. MbZ was appointed as the UAE's third president in May 2022 after becoming the country's de facto ruler in 2014. The appointment took 10 months and involved creating internal consensus with his five full brothers.

Aside from its role in the Israel-Gaza crisis, the UAE has also been sparring with Riyadh over key mediation topics such as Sudan and the Yemen crisis, oil-production strategies and geostrategic dominance in the Red Sea. In May 2023, the UAE suspended participation in a US-led maritime alliance to protect shipping in the Persian Gulf after Iran seized two oil tankers.

Relations with Russia have improved, sparking skepticism from Western partners. Over a million Russians visited the UAE between January and October 2023, representing a +67% increase over the previous year.

Insistent allegations that the UAE is becoming a transit point for products like electronics and semiconductors that can be repurposed to support Russia's war campaign raise reputational risks and may trigger sanctions. Exports of electronic parts from the UAE to Russia rose by more than seven-fold last year, making it the largest type of commodity delivered in that direction. Triangulations to bypass trade sanctions and increased concerns over limited money laundering and counterterrorism controls may restrain diplomatic and commercial relations with key partners and ultimately alienate Western businesses.