Wise Approaches

Abu Dhabi is leading the UAE's response to a climate of low oil prices, posting good growth figures and winning applause for its efforts to steady the ship.

Abu Dhabi, which has served as the capital of the UAE since the latter’s establishment in 1971, is an economic powerhouse, containing the majority of the country’s oil and gas wealth. But as the price of oil has dropped and, despite OPEC’s best efforts, remained in the doldrums, focus has shifted across the region to a life beyond oil. Abu Dhabi has, on top of unprecedented privatization, sought to rein in spending and introduce a VAT, all while encouraging the continued growth of the non-oil sector.

At the head of the ship is Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE and Ruler of Abu Dhabi, son of the leading force behind the establishment of the UAE, Sheikh Zayed bin Sultan Al Nahyan. And if a recent Standard & Poor’s (S&P) report is anything to go by, government efforts are certainly paying off. The ratings agency predicts a budget surplus of 4.5% between 2018 and 2020, thanks in large part to the new VAT, as well as a slightly improved global oil price outlook. S&P rates Abu Dhabi’s sovereign debt at AA/A-1 with a stable outlook, noting that the Emirate has a robust fiscal position, large currency reserves, and an estimated GDP per capita of USD75,000 in 2017. The ratings agency expects that real GDP growth will hover at around 2.7% in the next few years as oil production returns to previous levels and approaches the Emirate’s production capacity of 4 million bpd. Moody’s has also changed its outlook for the government of Abu Dhabi from negative to stable, and cited the government’s effective fiscal responses to declines in the oil sector, its commitment to economic reform, a renewed growth outlook for the broader economy, and a robust banking system.

And according to the Statistics Center of Abu Dhabi (SCAD), the Emirate’s economy is outpacing the country as a whole, growing by more than 7.7% in 4Q2016 compared to the same period in 2014. The Emirate’s GDP stands at around AED960.1 billion, with hydrocarbons representing over 50% of the figure. A quick glance at some other key metrics shows a 2016 inflation rate of 2%, with unemployment sitting at around 3.7%.

Moody’s has also offered the thumbs up, stating that fiscal reform has allowed the government to reduce its expenditure burden by nearly 23% over the last two years. Additionally, the ratings agency expected the Emirate’s overall debt to fall below 8% of GDP by 2018. Thanks to a hefty fiscal buffer in the form of the country’s sovereign wealth assets, which Moody’s estimates is nearly 200% of the Emirate’s GDP, Abu Dhabi and the UAE are expected to be more than capable of handling most unforeseen economic shocks.

Reduction in government spending does, however, have the potential to slow the Emirate’s efforts to diversify its economy away from oil and gas. Moody’s has forecast that non-oil real GDP growth will drop to 1.9% in 2017. This is a far cry from the impressive 8.6% growth in real non-oil GDP the Emirate recorded in 2014, and the decline is due in large part to reductions in government expenditures, slowing growth in real estate investment, and falling goods export numbers. While non-performing loans have risen, Moody’s expects that the banking sector’s underlying strengths will allow the sector to thrive in coming years.

The success of the Emirate and the country in diversifying the economic base has insulated the UAE from dramatic price shocks in the global market. According to HSBC, non-oil exports and commodity trading have grown by double digits in recent years. Tourism and real estate have also been important counterbalances to falling oil prices. There are some concerns among analysts, however, that the government’s attempts to rein in fiscal outlays might signal a cooling interest in infrastructure and real estate projects. If government spending continues to dry up, construction projects may have to be shelved.

Diversification has long been a key part of Abu Dhabi’s economic plan, and the Emirate’s Economic Vision 2030 lays out an ambitious roadmap for achieving it. Through various programs aimed at developing productivity and competitiveness, human capital, and physical and financial capital, Abu Dhabi is trying to stimulate sustainable economic development and economic stability. According to the Vision 2030 plan, the Emirate hopes to stabilize growth at 6% a year in order to develop a diverse economic foundation that can weather future uncertainties in the oil market. By 2030, Abu Dhabi hopes to have 64% of its GDP coming from non-oil economic activity. With a clear plan in place for the Emirate’s economic future, Abu Dhabi is in the midst of transforming itself into a cutting-edge economy, complete with strong industries across a wide variety of sectors.
Tourism in Abu Dhabi is expected to grow, too, adding yet another important source of non-oil GDP growth to the Emirate. After posting 8% growth in 2016, officials in the Emirate are trying to record similarly impressive rates in 2017 by focusing on China and India, two key markets for global tourism. According to the Abu Dhabi Tourism and Culture Authority, more than 4.4 million tourists stayed in Abu Dhabi hotels, and the average stay was 2.73 nights. Nearly 24.5 million passengers traveled through Abu Dhabi International Airport in 2016, representing more than 5% growth from the previous year. With nearly 300 direct flights between Abu Dhabi and India every week, officials hope to leverage this heavy traffic into increased tourism numbers. According to The National, Abu Dhabi currently has around 30,000 hotel rooms and 169 hotel and hotel apartments, and there are plans to increase the hotel infrastructure by roughly 10,000 rooms in the next five years.

As the government of Abu Dhabi has worked to diversify its economy, it has developed a plan to rely on and support its SME sector. The Emirate’s 2016-2020 industrial strategy seeks to enable the private sector and create long-term economic linkages between larger industrial entities and SMEs, according to Abu Dhabi’s Department of Economic Development. The Emirate recognizes that a sustainable economic growth model must include a healthy SME sector. Leaders in both private industry and the public sector are trying to stimulate entrepreneurship and innovation in industries traditionally dominated by large firms. As Abu Dhabi tries to expand its industrial base to 10% of GDP and boost the non-oil sector’s share of GDP to 40%, the government has identified SMEs as a core catalyst in this transformation. Recent economic headwinds hit SMEs harder then other firms, and Abu Dhabi responded by loosening certain banking regulations in order to prop up wavering firms. The change in regulation was also seen as a more long-term structural shift focused on moving more economic emphasis onto the smaller domestic firms that make up the backbone of the economy. Additionally, this shift is a key priority of the country’s Economic Vision 2030, which calls for enlarging the enterprise base and enhancing competitiveness.

Government and private industry are, however, working in concert to develop a plan that increases revenue without unduly burdening growth or retarding innovation. Tax structures in the Emirate have been a topic of concern for investors and consumers, and stakeholders across Abu Dhabi are trying to develop a revenue system that is forward-looking and sustainable. While there has been talk of a new corporate tax, there has yet to be any meaningful movement toward implementation or development. Certain government officials and leaders in the business community are, however, wary of such a tax, as they fear that new corporate levies might force companies out of Abu Dhabi, thereby undermining the Emirate’s accomplishments in diversification and development.

Government spending has also increased in recent months, indicating that recovery and growth may be speeding up. Spending projects totaling AED7 billion are in the pipeline, and expenditures will be directed toward large tourism projects. According to the Department of Economic Development, Abu Dhabi attracted more than AED95 billion worth of investment in 2016, 8% more than in 2015. While real estate has been a major destination for investment, the Emirate is trying to increase investment in finance and hospitality. Industry leaders and analysts are confident that as government spending picks up, strong growth will return quickly. Currently, the government is focused on developing a growth plan that creates long-term development while simultaneously generating funds for necessary projects.

On the global stage, one of the most recognizable Emirati faces is Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces. His leadership has seen the country assert itself internationally, with the UAE in the top-five global arms importers with an estimated military budget of USD23.5 billion in 2016. Dubbed by American Defense Secretary James “Mad Dog” Mattis as “little Sparta,” the UAE has had one of the most active, and by many accounts successful, foreign policies of any country on the planet in the past decade. Measured by per-capita punch, it is certainly one of the most ambitious. In addition to its impressive 98 diplomatic missions across the world (or one for every 14,000 Emirati citizens), the UAE boasts military bases on the Horn of Africa, the southern rim of Arabia, the mouth of the Red Sea as far north as Eritrea, and deep into the Mediterranean, from Benghazi (Libya) to Limassol (Cyprus). But, while it is ready to flex its muscle over perceived injustices, the Abu Dhabi-led UAE stands tall in the world of ideas. As the UAE ambassador to the US, Yousef Al Otaiba, wrote in a recent piece, his country’s vision in the region and world at large is to be on “a path guided by the true tenets of Islam: respect, inclusion, and peace.” This is a vision that “empowers women, embraces diversity, encourages innovation, and welcomes global engagement,” Otaiba wrote, and is already being put into place in the UAE, where Amal Al Qubaisi was recently made president of the country’s Federal National Council and the first woman in region to lead a national council. In addition to the opening of the country’s largest Indian Orthodox Church and the restoration and reopening of St Andrews Cathedral, the government also donated land for the construction of the Emirates’ third Hindu temple in 2015.

Setting out to establish a strong, capable, and accountable post-carbon economy “driven by innovation, human capital, rule of law, and open trade,” the country is also working in conjunction with NASA to develop the UAE Space Agency to the extent that it can put a probe around Mars by 2021. As part of the Emirate’s broader goal of demonstrating that it is possible to be “Muslim, moderate, and modern” without batting an eye, the Mars probe is hoped to be a source of inspiration for an entire generation of Emirati and Arab youth—a Kennedian “moon shot” for the 21st century Gulf.