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Risks and Vulnerabilities: United Arab

Emirates
Euromonitor International
09 June 2014

The United Arab Emirates (UAE) continues to grow steadily, supported by increased activity in the non-hydrocarbon
sector amidst diversification efforts. Backed by strong oil revenues, the country maintains a comfortable fiscal and
external sector position. On the downside, the economys growth trajectory is influenced by the global oil price
outlook. Overcoming a property bubble, the UAEs real estate market has stabilised. The outlook for construction
remains robust ahead of the World Expo 2020.

EXECUTIVE SUMMARY
Despite regional tensions, economic growth in the UAE maintained its steady upward path over the four-year
period from 2010 to 2013. As the country embarked on economic diversification, the UAEs annual real GDP
growth rose to 4.8% in 2013 from 4.4% in 2012, supported by robust activity in the non-oil sector;
Restrictive labour market policies and skills set mismatches have caused the UAEs youth unemployment rate to
rise from 11.0% in both 2009 and 2010 to 16.5% in 2013. The country could benefit from its continued
investments in the development of human capital by revamping the educational system and providing vocational
training;
The UAE follows a fixed exchange rate regime and maintains the dirham at a rate of AED3.7 per US$. Being a
net exporter, the oil-rich country continued to register a substantial trade surplus of US$81.8 billion or 20.7% of
total GDP in 2013 and a current account surplus of US$59.1 billion or 14.9% of total GDP in 2013;
Again, revenue generated from hydrocarbon exports supported the UAEs government exchequer, which
continued to maintain a general government budget surplus of AED190 billion (US$51.7 billion) or 13.0% of
total GDP in 2013. Public debt remained sustainable amounting to AED239 billion (US$65.0 billion) or 16.4%
of total GDP in 2013 and grew by just 2.8% (year-on-year) in nominal terms in 2013;
The UAEs bank asset quality dipped, following the global financial crisis of 2008-2009 and regional pressures
from the government debt overhang. As a result, the ratio of bank non-performing loans to total gross loans rose
consistently from 2.3% in 2008 to 7.8% in 2013;
Property prices in the UAE continue to rise. The Dubai all-residential property price index jumped up by 24.9%
in nominal terms during the period of January 2013 - November 2013, while that in Abu Dhabi rose by 19.7% in
nominal terms during the same period. Prospects for the UAEs construction and real estate sectors remain
strong ahead of the World Expo 2020.
Chart 1

An Overview of Risks and Vulnerabilities in the UAE: 2013

Source:

Euromonitor International from national statistics/IMF/UN

MAJOR COMPONENTS OF THE ECONOMY


Steady rise in growth during the course of economic diversification
Despite regional tensions, economic growth in the UAE maintained its steady upward path over the four-year period
from 2010 to 2013. Annual real GDP growth rose to 4.8% in 2013 from 1.3% in 2010, supported by robust activity
in the non-oil sector. With a total GDP of AED1.5 trillion (US$396 billion), the UAE was the second largest
economy (in US$ terms) in the Gulf Cooperation Council (GCC) in 2013; accounting for 24.2% of the total
combined GDP of the GCC.
Given the countrys massive hydrocarbon endowments, Mining and Quarrying was the most important sector,
accounting for 40.4% of total Gross Value Added (GVA) in 2013; followed by Financial Intermediation, Real
Estate, Renting and Business Activities (14.0%). Sectors such as electricity, manufacturing and public services
(administrative, education and community services) are gradually gaining importance as the UAE, like other
GCC countries, diversifies its economy away from oil-related activities.
The Mining and Quarrying sector grew the fastest in 2013, at 9.3% (year-on-year) in real terms, followed by
the Education, Health, Social Work and Other Community, Social, Personal Service Activities (5.4% year-onyear in real terms), as the government increased focus on human capital development.
Benefits from diversification could, however, be diluted by risks emanating from an overheating property market,
coupled with a downward slide in the global commodity price outlook. The UAEs annual real GDP growth is
forecast to moderate to 4.4% in 2014 and further to 4.2% in 2015 amidst ample supply and softening global fuel
prices.
Chart 2

Gross Value Added by Sector in the UAE: 2013

% of total GVA

Source:
Notes:

Euromonitor International from national statistics


(1) Wholesale & Retail Trade includes Repair of Motor Vehicles, Motorcycles and Personal and Household Goods;
(2) Financial Intermediation includes Real Estate, Renting and Business Activities; (3) Public Administration includes
Defence and Compulsory Social Security; (4) Education, Health & Social Work includes Other Community, Social &
Personal Service Activities.

SOCIO-POLITICAL RISK
Rising youth unemployment is a concern
The UAE is a federal government comprising seven member emirates, namely Abu Dhabi, Ajman, Dubai, Fujairah,
Ras al-Khaimah, Sharjah, and Umm al-Quwain. The countrys President and Vice-President are elected by the
Federal Supreme Council, without limitations on term periods. Sheikh Khalifa bin Zayed Al Nahyan (or Sheikh
Khalifa) has been the President of the UAE since 2004. The government is stable and the next legislative elections
are scheduled to be held in 2015.
The UAE is the least corrupt country of the GCC countries and ranked 26th out of 177 countries (jointly with
Austria) in the Transparency International Corruption Perceptions Index in 2013, better than Kuwait (69th),
Saudi Arabia (63rd) and Qatar (28th).
While the rule of law is usually maintained, political interference in the legal system eliminates the
independence of judiciary. The legal system is increasingly opening up to the countrys commercial community
(including foreign participants).Most TV and radio stations, barring those in Dubais Media Free Zone, are
owned and controlled by the government. As the UAE government has suppressed political dissent and
conducted a crackdown on increasing online criticism of the public administration, the countrys ranking on the
World Bank Voice and Accountability Ranking worsened from 152 out of 204 countries in 2011 to 164 out of
203 countries in 2012.
Chart 3

The UAEs Political Stability and Absence of Violence Ranking vs. Voice and Accountability
Ranking: 2007-2012

Source:
Note:

Euromonitor International from World Bank


2012 is the latest available data

The unemployment rate in the UAE was fairly stable during the period of 2008-2013. The unemployment rate in
the country stood at 4.7% in 2013, only marginally lower than 4.9% in 2008.
Restrictive labour market policies and skill-set mismatches caused the UAEs youth unemployment rate to rise
from 11.0% in both 2009 and 2010 to 16.5% in 2013. Efforts at revamping the countrys educational system and
provision of vocational training in the face of economic diversification are critical. The male unemployment rate
stood at 4.1% in 2013, while that amongst females stood much higher at 7.8% during the same year, as
participation of women in the workforce remains low.
Chart 4

Youth Unemployment Rate vs. Total Unemployment Rate: 2008-2013

% of economically active population aged 15-24, % of economically active population

Source:

Euromonitor International from International Labour Organisation (ILO)//national statistics

The country has a young population, with the number of persons aged 65+ accounting for just 0.5% of the total
population in 2013. However, the UAEs old-age dependency ratio stood at 0.6% in 2013 but is forecast to reach
8.4% in 2030, allowing for sufficient fiscal legroom for the country to invest in social security, in order to

combat population ageing, as well as allowing for investments in education and other human capital
development projects.
According to the United Nations, the UAE hosts the worlds fifth largest migrant labour pool of 7.8 million
persons in 2013. 90.0% of the countrys private workforce comes from India, Bangladesh and Pakistan.
Excessive reliance on migrant labour could keep the economy vulnerable to a sudden influx or exodus of
workers. Policy initiatives that outlaw confiscation of passports and provide for wage protection to migrant
workers are positive steps to protect the human rights of this segment of the workforce. However, enforcement
of these laws remains a challenge.

EXTERNAL SECTOR
Diverse country basket cushions UAEs external sector
The UAE is very open to trade, having a total-exports-to-total-GDP ratio of 80.6% in 2013. Thanks to sustained
global demand for fuels, total exports grew by 6.5% year-on-year in 2013, to equal US$319 billion in the same year.
Being a net exporter, the oil-rich country continued to register a substantial trade surplus of US$81.8 billion or
20.7% of total GDP in 2013.
Given the large oil endowments, Mineral Fuels was the main export item, accounting for 41.5% of total
exports in 2013; followed by miscellaneous Other Goods (30.9%).
56.7% of the UAEs exports were targeted to the Asia Pacific region in 2013; while 21.0% of total exports were
directed to the Africa and Middle East region in the same year. The UAEs export market is not confined to any
particular country, thereby cushioning it from country-specific shocks.
Chart 5

Source:

The UAEs Top 10 Export Destinations: 2013

Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

The countrys total-import-to-total-GDP ratio stood at 60.0% in 2013, up from 56.1% in 2008, suggesting a rise in
the role of imports within overall economic growth. However, imports totalling US$238 billion fell by 8.0% (yearon-year) in 2013 as consumer demand for imported goods continued to rise.
Other Goods was the countrys largest import item, accounting for 35.9% of total imports in 2013, followed by
Machinery and Transport Equipment (22.5%) and Basic Manufactures (19.1%). As the economy continues
to diversify the demand for imported manufacturing, raw material imports could rise further.
In 2013, 16.9% of the UAEs total imports were sourced from India, followed by China (13.7%) and the USA
(10.5%). Given the UAEs commodity composition and country profile for imports, it appears to be safeguarded
from region-centric shocks and commodity price fluctuations.
Chart 6

The UAEs Imports by Commodity: 2013

Source:

Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

Backed by strong trade, the UAE continued to register a current account surplus of US$59.1 billion or 14.9% of total
GDP in 2013, slightly lower than US$66.6 billion or 17.3% of total GDP in 2012, on account of increased remittance
outflows from expat workers in the UAE. Robust trade also helped boost the countrys foreign exchange reserves
that rose from US$31.6 billion in 2008 to US$66.8 billion in 2013.
While the UAE encourages foreign direct investment (FDI) into the country, restrictions to ownership and non-tariff
barriers limit the free movement of capital. Foreign investors are permitted to own up to 49.0% of any company,
with restricted ownership of land and stocks. There are no limits on export of capital or outward direct investments.
FDI inflows stood at AED35.3 billion (US$9.6 billion) in 2012 higher than the AED28.2 billion (US$7.7
billion) in 2011 but lower than pre-crisis levels of AED52.1 billion (US$14.2 billion) in 2007. Global
uncertainty coupled with regional tensions has had an adverse impact on FDI inflows.
Accordingly, the UAEs FDI intensity dipped to 2.5% of total GDP in 2012 from 5.5% in 2007, reflecting a
decline in the role of FDI as a source of economic growth against a volatile global economy.
The currency in the UAE, the dirham, is managed by the central bank, the Central Bank of the United Arab Emirates
(CBUAE), under a fixed exchange rate regime, at the rate of AED3.7 per US$. A fixed exchange rate could make the
economy vulnerable to external sector crisis due to sudden sharp devaluation of currency, rather than a smooth
market-determined change.

GOVERNMENT FINANCE
Fiscal position remains sustainable; reforms underway
Backed by revenue generated from hydrocarbon exports, the UAE registered a general government budget surplus of
AED190 billion (US$51.7 billion) or 13.0% of total GDP in 2013. This stood slightly lower than the AED201 billion
(US$54.7 billion) surplus or 14.2% of total GDP in 2012, as the government expanded its spending plans for
infrastructure and human development.
Total government revenue amounted to AED490 billion (US$133 billion) in 2013, accounting for 33.7% of total
GDP. The UAE, like most other GCC members, does not impose taxes on wealth, profit and corporate income.
Government revenue moderated marginally by -1.4% (year-on-year) in real terms in 2013, due to lower oil
export earnings as global fuel prices softened. All GCC governments, including the UAE, are considering the
introduction of sales tax or value-added tax (VAT), which could significantly supplement government revenues
of these countries. The Abu Dhabi Investment Authority (ADIA) the countrys Sovereign Wealth Fund (SWF)
is a critical medium that helps the country manage its oil reserves and related wealth. According to the SWF
Institute, the ADIA is the worlds second largest SWF with assets totalling US$773 billion in 2013 and therefore
provides a major fiscal backing to the government.
Total government expenditure stood at AED300 billion (US$81.7 billion) in 2013; accounting for 20.6% of total
GDP and growing by 2.1% (year-on-year) in real terms in the same year. The government increased spending on
sectors such as health, education and employment generation, which were coupled with generous energy
subsidies. The localisation of jobs in the UAE, including the provision of an additional 1,650 positions in 2013,

has caused the government to increase its employee compensation (about 37.0% of total expenditure in 2013).
In its 2014 budget, the government once again emphasises these core spending areas.
Public debt amounted to AED239 billion (US$65.0 billion) in 2013, growing by just 2.8% (year-on-year) in
nominal terms in 2013. As percentage of total GDP, public debt stood at 16.4% in 2013, up from 12.5% in 2008.
The most recent refinancing deal, where Abhu Dhabi agreed to refinance Dubais US$20.0 billion debt for five
additional years from 2014 onwards, lends stability to the countrys debt sustainability and credit worthiness.
The UAE maintained a high sovereign rating of Aa2 with stable outlook in 2013, from rating agency Moodys,
on the back of a sound fiscal position; strong external balances; and improved growth prospects from economic
diversification.
Chart 7

Public Debt vs. General Government Budget Balance in the UAE: 2008-2013

% of total GDP

Source:

Euromonitor International from National Statistics Offices//International Monetary Fund/OECD

FINANCIAL STABILITY
Domestic debt market needs to develop to support higher prudential capital
buffers
After becoming a regional financial hub for the Middle East region, the UAE is gradually attaining a global footing
towards becoming a major financial centre. The Dubai International Financial Centre, a financial free zone,
continues to be a major attraction for foreign banks, as they can retain 100% ownership and benefit from tax
exemptions.
In 2013, bank claims on the private sector rose by a robust 13.9% (year-on-year) in real terms over 2012, to
AED959 billion (US$261 billion), reflecting the growing borrowing-lending activity in the country. Similarly,
aggregate bank lending rose by 7.1% (year-on-year) in nominal terms in 2013, the fastest pace since the fourth
quarter of 2009, particularly on the back of rising demand for consumer credit.
The UAEs bank asset quality deteriorated, following the global financial crisis of 2008-2009 and regional
pressures from government debt overhang. Therefore, the ratio of bank non-performing loans to total gross loans
rose steadily from 2.3% in 2008 to 7.8% in 2013.
While the country seeks to adhere to the highest capital adequacy norms, as outlined under the Basel 3 accord,
the CBUAE acknowledges that domestic debt markets are nascent and meeting all capital buffers would be a
challenge.
Chart 8

The UAEs Bank Nonperforming Loans to Total Gross Loans: 2008-2013

Source:

Euromonitor International from International Monetary Fund (IMF), International Financial Statistics

Price levels in the UAE remain comfortable and are monitored by the CBUAE. As consumer demand rises and
economic activity surges in the run up to the World Expo 2020, inflation is expected maintain an upward trajectory.
Annual inflation in the UAE dipped from 12.3% in 2008 to 1.6% in 2009 against a slowing economy.
Continuing in the low trajectory mode, inflation touched 0.7% in 2012 and slightly higher at 1.1% in 2013 as
demand for consumer goods in the country rose. Rising house prices also fed into overall inflation in the
country. Inflation is forecast to rise to 2.0% in 2014 and further to 2.8% in 2015.
The benchmark interest rate in the UAE has been stable, recorded at 1.0% as of January 2014. The low interest
rate supports greater lending and borrowing activity - essential in promoting investment and growth in the
country.
The UAE economy has been flush with liquidity. Total money supply amounted to AED380 billion (US$103
billion) in 2013, growing by a substantial 26.9% (year-on-year) in nominal terms in the same year.
Chart 9

Inflation in the UAE: 2008-2013

Source:

Euromonitor International from national statistics//OECD/UN/IMF

REAL ESTATE
Strong growth in housing market
The UAE averted a property price bubble with the enforcement of definitive measures, such as an increase in
property registration fees; restrictions of bank lending for real estate; and tighter mortgage rules that helped calm the
property market in 2013. Property prices, however, continue to surge on the back of increased demand, particularly
after Dubai won the bid to host the World Expo 2020.
In 2013, activity in the construction sector moderated, with GVA from construction declining by -2.6% to AED114
billion (US$31.1 billion) year-on-year in real terms and accounting for 7.9% of total GVA. The sector accounted for
6.3% of the total employed population in 2013. Prospects for the construction sector are strong, riding on the back of
increased government spending. For instance, Abu Dhabi plans to spend AED330 billion (US$90.0 billion) on
housing, roads, schools and other infrastructure over the 2013-2017 period. The plan includes construction of 12,500
houses during the same period. Similarly, the large-scale construction for the World Expo 2020 - including the Expo
site, Expo village, staff housing, and transportation network that is scheduled to start in early 2015 and end by
October 2019, is expected to boost the countrys construction sector.
Chart 10

Real Growth in GVA from Construction and Real GDP Growth in the UAE: 2008-2013

annual change (%)

Source:

Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World
Economic Outlook/UN/national statistics

The Dubai all-residential property price index jumped up by 24.9% in nominal terms during the period of
January 2013 - November 2013, while that in Abu Dhabi rose by 19.7% in nominal terms during the same
period, according to the Global Property Guide. With Abu Dhabi opening up its real estate market enabling
foreign nationals to own property on a freehold basis in January 2014, the interest in UAEs real estate market
has risen further.
In 2013, the total number of real estate transactions in Dubai rose by 52.0% to 63,652 with the value of these
transactions rising by 53.0% (year-on-year) in nominal terms to AED236 billion (US$64.3 billion), according to
the Global Property Guide.
According to the Global Property Guide, the UAEs house price-income ratio stood at 7.6x in 2013, lower than
Jordan (28.2x) and Morocco (63.7x), indicating that housing is relatively affordable in the country.
Chart 11

The UAEs House Price Index: 2007-2012

Source:

Euromonitor International from national statistics

ENERGY & ENVIRONMENT


Efforts to increase use of renewable energy
The hydrocarbon rich country is not dependent on mineral fuel imports to meet domestic requirements; in 2013, the
UAE imported mineral fuels worth US$3.3 billion, accounting for just 1.4% of total imports. While the countrys
dependence of oil-generated income could make its external sector volatile, the UAE is a leading producer and
exporter of oil and gas in the world and can influence global fuel prices.
In 2013, the UAEs total primary energy consumption stood at 92.7 million tonnes of oil equivalent (mtoe), up from
82.9 mtoe in 2008. This was lower than Saudi Arabias total primary energy consumption of 231 mtoe in 2013, yet
higher than that of Kuwait (36.0 mtoe) and Qatar (33.1 mtoe).
Natural gas accounted for 63.6% of the UAEs total primary energy consumption in 2013, followed by crude oil
(36.4%). The country is only gradually taking initiatives to tap renewable sources of energy. For example, the
country aims to generate 50.0% of the World Expo 2020s operational energy requirements from renewable
energy on-site.
The UAE has committed to obtaining 7.0% of its total energy needs from renewable energy by 2020. The
country has also submitted a bid to host the World Energy Congress (WEC) 2019.
Chart 12

The UAEs Primary Energy Consumption: 2013

Source:

Euromonitor International from BP Statistical Review of World Energy

The UAE has not experienced any major recent natural disasters but its proximity to the coast and lack of elevation
coupled with a desert topography, could make it vulnerable to rising sea levels, which are expected over the long
term due to global warming and desert storms.
Like other Middle-Eastern countries, the UAE suffers from water shortages, which are particularly acute in Abu
Dhabi. The tapping of underground water is not sustainable and tensions to find new water reserves have intensified
over time. In 2013, Abu Dhabi outlined a five-year Water Resource Management Strategy involving strategies to
identify and allocate budgets for new water sources, desalination of water, recycling water and demand-supply
management.
With CO2 emissions of 276 million tonnes in 2013, the UAE recorded the second largest emissions amongst the
GCC, after Saudi Arabia (585 million tonnes). On a per capita basis, the UAE recorded the second highest CO2
emissions of 32,798 kg amongst the GCC, after Qatar (37,036 kg), in 2013.
CO2 emissions per unit of output were 697 grams per US$ in 2013, slightly higher than the 2008 level of 621
grams per US$. Similarly, the energy efficiency of the country improved from US$4,273 per tonne of energy
consumed in 2008 to the US$3,806 per tonne of energy consumed in 2013.
The government has also targeted to achieve CO2 emissions reductions of about 1.1 billion tonnes cumulatively
by 2030.
Chart 13

The UAEs CO2 Emissions vs. Energy Efficiency: 2008-2013

000 tonnes, US$ per tonne

Source:
Note:

Energy Information Administration of the US Government, International Energy Annual


CO2 Emissions encompass the consumption and flaring of fossil fuels

DEFINITIONS
Corruption Perceptions Index relates to perceptions of the degree of corruption as seen by business people and
country analysts.
Foreign Direct Investment (FDI) is investment made to acquire a lasting interest in or effective control over an
enterprise operating outside of the economy of the investor.
FDI Inflows are the net value of inward direct investment made by non-resident investors in the reporting economy,
including reinvested earnings and intra-company loans, net of repatriation of capital and repayment of loans.
FDI Intensity measures FDI inflows as percentage of total Gross Domestic Product (GDP).
Gross Value Added (GVA) is a measure of the contribution to total Gross Domestic Product (GDP) made by an
individual producer, industry or sector, and represents the value of output less the value of intermediate
consumption. It is calculated without making deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources.
House Price-Income Ratio is the ratio of the cost of a typical upscale housing unit of 100 square metres compared to
the countrys GDP per capita.
Net Migration Rate is the difference between the number of persons entering and leaving a country during the year
per 1,000 persons.
Old-Age Dependency Ratio is the percentage of the population aged 65+ (retired) per population aged 15-64 (of
working age).
Openness of the Economy is reflected by exports as a percentage of total GDP. More than 50.0% is very open;
25.0%-49.0% is open; 6.0%-24.0% is relatively open; and 0%-5.0% is relatively closed, high barriers to trade.
Political Stability and Absence of Violence Index reflects a better score in a higher position and measures the
perceptions of the likelihood that the government will be destabilised or overthrown by unconstitutional or violent
means (including domestic violence and terrorism).
Unemployment Rate represents unemployed population as a percentage of the economically active population, also
known as the labour force (the total number of people employed plus unemployed).
Voice and Accountability Index captures perceptions of the extent to which a country's citizens are able to
participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.
A high ranking reflects a high score in the index.
Youth Unemployment Rate refers to the unemployed population aged 15-24 as a percentage of economically active
population aged 15-24.