The Right Tools for the Job

Following the implementation of a reviewed fiscal policy, the IMF in October 2017 forecasted the UAE’s 2018 GDP growth at 3.4%. The first of such measures came on January 1, […]

Following the implementation of a reviewed fiscal policy, the IMF in October 2017 forecasted the UAE’s 2018 GDP growth at 3.4%. The first of such measures came on January 1, 2018, when the nation saw the implementation of a 5% VAT, which followed the establishment of the UAE Federal Tax Authority. As a consequence, purchasing power is likely to decrease, as the new tax adds up to the cuts seen in energy subsidies that have increased the cost of power, water, and fuel. Nonetheless, the UAE remains the premier destination in the MENA zone for inward FDI across the industrial spectrum, registering USD11 billion last year, ranking 21st in the World Bank’s Ease of Doing Business report for 2018, up five spots from 2017. FDI growth is foreseen at 2-3% for this year, restoring private investors’ confidence as the Emirate, historically an exporter of capital, seeks to attract funds from all over the world.

Ratings Endorsement on a Bright Outlook
Abu Dhabi is the largest of the Emirates and home to the nation’s capital that, according to a recent report by Knight Frank, ranks seventh globally on the list of cities expected to see the strongest growth in households’ earning over USD250,000 between 2017 and 2022. These numbers are supported by a forecast GDP growth of roughly 3% for 2018, propped up by non-oil growth of 4.2%. These welcome prospects received a nod of approval in June 2018 when S&P affirmed its AA/A-1+ ratings with a ‘stable’ outlook. The decision was notably based on the financial buffer of the Emirate’s massive net asset position (AED791 billion in 2016). In fact, Abu Dhabi is poised to sustain a heady net fiscal asset position of close to 235% of GDP in 2018-2021, according to S&P.

Sovereign Wealth Funds as Long-term Investment Channels
A very low debt-to-GDP environment and accumulated wealth has resulted in the creation of hefty local investment arms that play a vital role in the strategic economic outlook of the country. Not to mention, these sovereign wealth funds represent an invaluable revenue buffer in case there is a need to fill up budgetary shortfalls across the UAE. The top-two sovereign funds are Abu Dhabi Investment Authority (ADIA), the world’s second-largest with USD828 billions in assets, and Mubadala Investment Company, which, following the absorption of Abu Dhabi Investment Council earlier in 2018, will have a portfolio worth over USD200 billion. That being said, the short-to-medium term engine of the economy will still be the hydrocarbon industry.

Oil Remains a Vital Enterprise
Further justifying S&P’s confidence are revenue streams from a stronger oil price environment, as the IMF forecasts oil prices averaging at USD53 per barrel until 2021, based on suggestions from both Saudi Arabia and Russia to extend production cuts this year. The oil sector in 2017 shrank 1.6% YoY, essentially due to the OPEC-plus mandate whereby the UAE cut production by 6.4% to an average of 2.89 million bpd in 4Q2017. With these figures in mind, economic autonomy and stability have been set as top priorities for Abu Dhabi’s future: The Emirate can no longer depend on oil, let alone fluctuation in oil prices. As such, the leadership introduced tough fiscal consolidation and rebalancing measures, supported by extensive spending cuts and wide restructuring among government departments. Naturally, even state-enterprise Abu Dhabi National Oil Company took action, continuing on its ADNOC 2030 Strategy journey, set to make the local energy sector and the broader UAE economy more efficient by achieving a more profitable upstream, a more sustainable and economic gas supply, and a more valuable downstream. The latter is supported by the announcement of a AED165-billion investment that, by 2025, will double refining capacity and triple petrochemical production, resulting with an estimated 15,000 high-tech jobs.

The Wider Vision
In a TBY interview, Faraj Ali Bin Hamoodah, Chairman of Bin Hamoodah Group, summarized the driving force behind the Emirate’s economic diversification with reference to its Energy Strategy 2050, launched in 2017. “The model to follow,“ he observed, “are economies such as Singapore, Norway, Ireland, and New Zealand.“ To his thinking, “The downturn in prices per barrel was a blessing, because it taught an important lesson on how volatile and dependent Gulf countries were on selling a single resource.“ As of 2016 the oil and non-oil sector contribution to nominal GDP was at 49.2% and 50.8%, respectively. The figure today is at around 72%. The non-oil component is estimated printing 3.7% growth this year, buoyed by northbound investor sentiment, vibrant tourism, and revamped spending of majority state-owned companies. The Abu Dhabi Economic Vision 2030, the undercurrent of all economic activity in the Emirate, envisages the development of a diversified range of sectors, which together have the potential to generate hefty 7.5% annual growth. These are capital intensive undertakings, but with substantial export dividends worth the necessary CAPEX. As such, key sectors toward which investments are being geared, apart from the traditional real estate and blue-chip equities, have been industrial manufacturing, ICT, health, education, and aerospace and defense. Overall, this is a major learning period for Abu Dhabi, but the leadership is well aware of the necessary steps to take to ensure the long-term sustainability of the economy.

Stimulating Developments
As part of the Abu Dhabi Vision 2030, 2018 witnessed a new wave of rulings from the Abu Dhabi Executive Council to provide the right commercial environment for the real economy to grow. In May this year, a ruling stated Abu Dhabi companies would be exempt from administrative fines at least for the remainder of 2018 to foster commercial activity, while in July the government announced a three-year stimulus package of AED50 billion to expedite diversified growth across key earmarked sectors and stabilize the shock that followed the oil price drop. Moreover, industrial start-ups and SMEs have seen new measures taken to make licenses more readily available and to remove some of the pre-requisites to business activity, and with a simpler online process. The Abu Dhabi Accelerators and Advanced Industries Council (Ghadan), meaning “tomorrow,“ has been established as a lightning rod for vanguard technologies of the information economy. Another incentive is the availability of dual commercial licenses that permit companies resident in free zones to also work beyond them by participating in state tenders. This system will bolster synergies between locally present skill-sets and domestic development projects. And then there’s…

Last year, by official data, Abu Dhabi saw record visitor numbers almost up by double figures (9.8% YoY), as 4.88 million tourists sampled the Emirate’s 160-plus hotels (26,821 rooms) and rental properties. The preeminent source market has regularly been the UK, 270,000 arrivals from which bumped the previous year’s print by 13%. These numbers are even more impressive, given the 10.7% drop in traffic at Abu Dhabi International Airport in the first three months of 2018. As the Emirate is very much billing itself as an essential destination for discerning tourists primarily seeking an experience of culture and heritage, the government anticipates welcoming 8.5 million visitors by 2021. The strategy seems to bring its results, as the opening of its branch of the Louvre led to a 61% increase in French tourist arrivals in the first half of 2018. That being said, domestic tourism stays saw a more modest YoY rise of 2.6%, although there is a feeling among industry experts that it is just a matter of demand matching the increased supply currently provided by the hospitality sector.