UAE Economy and its cornerstones

Recently, I was reading the Financial Stability Report issued by UAE Central Bank every year, and the Preface written by Sultan Bin Nasser Al Suwaidi, then Governor of the Central Bank. In very crisp language, he had pronounced that economy performed healthy in 2013, underpinned by high oil prices, robust performance of tourism, trade and transport sector and recovery in real estate prices. This, I believe totally encapsulates the definition of UAE Economy. Yes, this Country is largely dependent on oil prices, but over the years have built a fail safe through growth in tourism and hospitality sector and also, transport.

According a Research Report published by Emirates NBD in June 2014, Oil continues to constitute 33% of UAE's economy, with real estate forming the second largest contributor at 12%.


A Comparison of UAE GDP and oil prices given below. Both indices moved in the same direction, although, there was a time lag in both fall and recovery of GDP. So now, as the prices go down for oil, can we see a fall in economic growth somewhere in 2015 mid to end region?
 

Also, as seen in the chart below, non oil GDP has been a driving factor of UAE real GDP Growth. Let's take a look on the major constituents of non oil growth.

- Real Estate and Construction: With a real estate market which boasts as one of the most loved city to live in, real estate prices really sky rocketed in the Country post the Expo 2020 announcement, making new construction projects more attractive. Stricter regulations to prevent another bubble and mortgage caps have dampened the sudden spike a little, but real estate prices still face north. After the crisis, property prices started rising since end of 2011, with prime properties recording a 33% growth in 2012 alone.  While prime properties cooled a bit in 2013, other main stream areas like DSO, JVC, Sports City etc recorded 30% hike in 2013. A total of AED 114 Bn was invested in residential properties in Dubai in 2013, followed by AED 50 Bn investment in 1H 2014. To state the obvious, UAE nationals form the largest chunk of investors in UAE property market, followed by Saudi Arabia and other GCC nationals. Indian, Pakistani and British expats also invest substantial amount in UAE market. This recovery in real estate prices, coupled with liquidity in the market for lending construction projects and better regulated off plan sales allowed many stalled projects to be revived, there by boosting the GDP growth.

- Tourism: with many Government initiatives to project the Country as a major tourist destination, Dubai especially has become a mecca for the premium traveller. With shopping destinations offering all the global brands, and infrastructural wonders making your visit worth while, tourism is fast becoming an integral part of the Country's GDP. Contribution from tourism sector is driven by growth in Hotels, travel agents, airlines, restaurants and liesure industries which directly service the tourists. According to World Travel and Tourism Council, Travel and Tourism contributed 4% of GDP in 2013 at at AED 56.5 Bn. New construction of Hotels and Theme Parks are expected to increase the proportion going forward.  

- Transport and Logistics: Dubai, through its locational advantage is slowly stealing the spot in global aviation sector as the sought after hub in large haul space, which once belonged to Heathrow and Paris. The UAE's two world-class airlines, Etihad and Emirates, have played a major role in the advance of the tourism industry. Dubai Airport is one of the top two busiest airports in the world, serving 126 airlines. Annual passenger traffic in 2013 reached 66,431,533, up 15.2 per cent compared to 57,684,550 recorded during 2012. In addition, investments are pouring in to various freezones, airports and ports in the Country. Dubai is developing DWC, its second airport, while Abu Dhabi is fast developing its Kizad and Khalifa port.  

Stock Market Performance
All said and done, stock market performance provide the general idea of investor confidence and industry performance in a region.


As seen in chart above, UAE stock market (in light blue above) posted a stable recovery post the crash in 2008-09 riding on numerous factors, but more pronounced is the recovery that happened towards the end of 2013. This was more or less aligned to market sentiment attached to EXPO 2020 announcement which happened in November 2013. That boost took the index all the way to pre-crisis levels.  In comparison, the US stock market had a more steady incline to pre-crisis levels. Now, as I''m writing this, UAE market is witnessing a correction associated with the sudden fall in oil prices.Oil is trading in the range of USD60-65, which is below the break even level of USD75-80 required for UAE to keep its budget without deficit. The market is worried about a decrease in Government spending to keep deficit in check, which will jeopardise many developmental projects. However, its worth noting that UAE has enough reserves to meet the fall in oil prices, if this is temporary. But that's story for another analysis altogether. Chart from recent IMF report given below. UAE can withstand oil price below 100, while Oman and Bahrain will be in trouble if this price range persists for long time.

Government Debt Levels
Aided by its natural resources, the UAE has always kept its Government Debt at manageable levels and in fact reduced it to a large extent post the crisis to stabilise the economic fundamentals. As seen below, Government debt to GDP fell from highs of 23% in 2010 to 16.7% in 2014. To put things in perspective, the largest economy, the UAE has Government debt over 100% of its GDP, while India manages to keep it at 70-75%. China, the giant which controls global trade flow, keeps its debt at c.25% of GDP. In contrast, Saudi Arabia has it at close to zero.

Outlook
Underpinned by Government efforts to diversify economic stability from Oil prices, the economy has enough fire power to withstand temporary disruptions in oil price stability. The Country has good foreign reserves, well managed debt position and budget surpluses, ample natural resources, well capitalized banking sector (part of another story in my blog, to be updated soon) and several well performing non oil economic sectors. Overall, the economy has a good positive outlook even in the face of falling oil prices.