UAE country outlook

UAE country outlook detailing political and economic issues.

POLITICAL STABILITY: The political scene will remain broadly stable in the forecast period; there is a risk that some political protests will be held, but these are likely to be limited and non-violent. The president of the UAE and the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, has the backing of the ruling families in the other six emirates, including the ruler of Dubai and prime minister of the UAE, Sheikh Mohammed bin Rashid al-Maktoum. Sheikh Khalifa enjoys the support of his half-brother and designated crown prince, Sheikh Mohammed bin Zayed al-Nahyan, a younger, more dynamic figure. However, the revolution in Egypt, and the protests in Bahrain have unnerved the authorities, who plan to set up a force of foreign fighters to bolster domestic security in the face of a perceived threat of Iran-inspired destabilisation.

ELECTION WATCH: The UAE is governed by the Supreme Council, which comprises the leaders of the seven emirates. The Federal National Council (FNC) is an advisory body to the Supreme Council, and has 40 members, who are UAE nationals. The FNC has a supervisory role and is responsible for examining proposed federal legislation. Apparently prompted by the social unrest in the region, the UAE president, Sheikh Khalifa, announced the creation of a committee to oversee the FNC election—the current term expired in mid-February. The election will be held in September 2011.

INTERNATIONAL RELATIONS: The UAE will deepen its relations with the US and major Western powers, as the risk of conflict over Iran’s nuclear programme persists. The UAE’s relationship with Asia, especially China and India, will play an increasingly prominent role in trade, security and investments in the region. The unrest in the Middle East has created the potential for strains to appear in the UAE’s traditionally close relations with the West.

POLICY TRENDS: The UAE will remain reliant on the hydrocarbons sector, which will be the main engine of growth during the forecast period. That said, the government, especially in Abu Dhabi, will continue to pursue its diversification programme through large-scale investment in infrastructure, industry and services. The Dubai government, in contrast, will concentrate on paying off its debts and will reduce government spending in 2011-15. Dubai’s problems are far from over, as shown by the government’s recent takeover of Dubai Bank, whose financial health had been deteriorating. Dubai will refocus its efforts on promoting important sectors such as trade and tourism.

ECONOMIC GROWTH: The National Bureau of Statistics (NBS) has revised historical real and nominal GDP data. This revision has affected forecasts that rely on GDP growth. According to the revised data, real GDP fell by 1.6% in 2009. We estimate that the economy grew by 2.1% in 2010 and forecast that GDP growth in 2011 will pick up strongly, to 3.6%, owing to high oil production, supported by high oil prices. Real GDP growth is forecast to average 5% in 2011-15, much higher than the estimated rate of 3.4% in 2006-10.

INFLATION: The NBS compiles monthly statistical data at a federal level and has changed its base year for inflation to 2007 for data from 2008 onwards. Official estimates indicate that average annual inflation was 0.9% in 2010. As the economy recovers, and oil and international commodity prices increase, we expect inflationary pressures to re-emerge gradually, especially in light of the projected expansion in infrastructure development. We expect inflation in 2011 to average 2.5% owing to an increase in prices of grains, sugar and other basic items. However, low housing costs will keep inflation at a manageable level, at an average of 2.2% in 2011-15. The official basket used by the UAE government is representative of prices faced by the local Emirati population—who benefit from extensive subsidies—rather than the expatriate community, who make up almost 90% of the labour force. The authorities have announced that the composition of the price basket is under review.

EXCHANGE RATES: The UAE dirham’s peg to the US dollar (at Dh3.673:US$1) is expected to remain in place in the forecast period. However, questions about its effectiveness will re-emerge, as the Central Bank of the UAE has established a panel of international experts to advise it on future policy. The Central Bank remains committed to the existing system. The peg has provided stability for decades, and, having ridden out the problems that a fixed currency brings for this long, the authorities seem keen not to change the system. The UAE’s withdrawal from the GCC monetary union project has no immediate implications for the exchange rate over the forecast period. Critics of the currency peg have argued that it restricts monetary policymaking by tying domestic interest rates to US rates. Despite the peg, the cost of living in the UAE will increase substantially in 2011-15, as the purchasing power of the dirham declines.

EXTERNAL SECTOR: We estimate that the merchandise trade surplus narrowed in 2010 but expect it to widen sharply in 2011 as both oil prices and production increase and growth in non-oil exports picks up. The value of exports will grow robustly in 2011-15, reflecting the increasing importance of non-oil exports as a result of the UAE’s diversification programme. However, the rapid growth in the value of imports, especially in the second half of the forecast period, will restrict the increase in the trade surplus. The trade surplus will average a healthy 15.4% of GDP in 2011-15, although this is lower than in the historical period (2006-10).

SOURCE: Country Outlook