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UAE unfazed by economic challenges ahead

Lower oil prices are a harsh reality and the UAE’s vision of a diversified economy must now face the true test of implementation. Unity is key to transition in GCC region.

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With the second largest economy in the Arab world, the UAE has pursued a conscious strategy to develop away from an oil-dependent economy since the country’s founding in 1971. Lower oil prices have made the UAE’s economic diversification practically prescient, and helped to place it ahead in the region with a GDP growth rate of 2.6% in 2017. That doesn’t mean the UAE is unscathed by the oil slump. The IMF has downgraded its forecast for the country’s economic growth twice in 2016, from 2.6% to 2.4%. The IMF praised the UAE’s consistent diversification efforts, but warned that curbing government spending and cutting remaining energy subsidies were essential to future growth and development. As 2017 dawns, the key to ensuring the UAE’s vision will continue to rest on its ability to maintain a strong, unified presence throughout the region and the world.

His Highness Sheikh Mohammed Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Supreme Commander of the UAE Armed Forces, supports the country’s unified economic vision as critical to the success and stability of the nation and its citizens. “Do not be concerned as long as our nation is united.” Though each emirate has pursued individual economic objectives, the country has adopted a collaborative economic plan for a diversified economy. This unified effort means the UAE is introducing the previously unthinkable – taxation. VAT is considered a game-changer for the country’s own development plans and for the GCC. The UAE will introduce VAT in 2018 for businesses with $1 million of revenue or more. The rate is expected to be 5% with some industries exempted. The government anticipates generating over $3.3 billion in revenue, or roughly 1% of the UAE’s current GDP.

The UAE also recently established the Federal Tax Authority, which has led to speculation that the country will follow the IMF’s recommendations to implement additional taxes. Taxation, even VAT, will have serious consequences for the UAE’s private sector. Additionally, how VAT revenue will be divided between each emirate and whether emirates may establish individual policies remains to be seen. Any move toward emirate-specific tax policies could undermine the UAE’s economic unity. SMEs are the heart of the UAE’s post-oil economic vision and each emirate hosts its own free zones with regulations set according to their own economic objectives. However, SMEs across the UAE have felt the pressure of the strong US dollar and slow global economy. SMEs make up 86% of the UAE’s total workforce and 60% of its GDP, according to Sultan bin Saeed Al Mansouri, the UAE’s Minister of Economy. Though they account for 94% of the UAE’s operating companies, SMEs have felt the brunt of delayed payments, increased governmental fees, stagnant employment, and lower liquidity. Considered central to the UAE’s diversification policy, SMEs have struggled since oil prices hit their lowest point in 2014 and have yet to bounce back. New incorporations were up 18% in Q1 of 2016, but no data exist regarding how many have closed. Instead, the Emirates NBD sponsored Purchasing Managers Index (PMI) gives some insight. Lower oil prices slowed private sector growth as governments across the GCC tightened belts with cautious overtures toward austerity.

The PMI showed the UAE’s non-oil private business sector activity falling from 54.1% in September 2016 to 53.3% in October 2016, the lowest level in six months. Though the PMI showed promising signs for a stronger Q4, employment stagnated and new work was subdued. The reduction in cash deposits with banks also had a negative impact on the private sector’s liquidity whilst governments sought relief from low oil prices through sovereign bonds and drawing down on savings, which further stressed the money market. The construction, hospitality, and tourism sectors supported the economy, but SMEs absorbed most of the pressure. The new federal bankruptcy law may provide relief, allowing ailing SMEs to restructure and removing some criminal liability for company debts. However, an increased focus on relieving day-to-day economic issues would better serve the UAE’s overall economic vision, such as increasing incubator funding for national and expatriate SMEs, adjusting regulatory frameworks to boost e-commerce, and working with banks to ease borrowing and loan restructuring. China remains a bright spot in the UAE’s economic landscape. The countries maintain strong bilateral trade ties, and Chinese companies continue to establish regional offices in the UAE to access the MENA market for a diverse range of goods.

The UAE is clearing the way for Chinese investors with a commercial representative office in  Shanghai as  well  as holding conferences and exploratory meetings. Chinese construction and engineering companies are now moving into the UAE’s lucrative property development sector. China State Construction Engineering Corporation (Middle East) LLC is a regular joint venture partner with major UAE developers. Tourism from China has increased significantly, particularly for Dubai and Ras Al Khaimah, but China has suffered its own economic setbacks. Real growth is at the slowest level in 25 years while debt is high. Though a Chinese economic meltdown is unlikely, there is cause for concern and caution going forward to gauge whether actual growth develops. The UAE hasn’t discounted long-standing trade partners, including the UK. Prime Minister Theresa May has made overtures to the GCC to set the stage for a new future following Brexit. She noted that, “As the UK leaves the EU, we should seize the opportunity to forge a new trade arrangement between the UK and the Gulf.” Ms. May recently attended the GCC Summit, becoming the first UK prime minister to attend and the first female leader to meet with GCC leaders collectively. At the Summit, GCC and UK leaders issued a joint statement, declaring that, “We will make it a priority, when the UK leaves the European Union, to build the closest possible commercial and economic relationship, and [work] even more closely with business to promote actively GCC-UK economic engagement beyond current levels.” Ms. May also emphasised that, “I want these talks to pave the way for an ambitious trade arrangement.”

Through hard work, the country is better positioned to transition to a less oil-dependent economy, but continued collaboration between emirates and cautious reflection coupled with careful action going forward will ensure the UAE’s vision becomes a reality.