Risk drivers and outlook

  • Despite political criticism, domestic stability is not affected by the regional unrest, which helped the United Arab Emirates (UAE) benefit relatively from the past year and a half’s events.
  • Strong economic recovery since 2011 should continue, bolstered by non-hydrocarbon sectors.
  • Debt restructuring of government-related entities proceeds, but refinancing challenges remain.
  • The federation benefits from a strong external financial position, based on high energy revenues and mostly accumulated in Abu Dhabi’s sovereign wealth fund.

Facts & figures

Pros

  • High energy reserves and revenues
  • Abu Dhabi’s ADIA is the world’s largest sovereign wealth fund
  • Location: inter-regional trade hub
  • Stability is attractive for investors and tourists

Cons

  • Despite diversification efforts, strong dependency on energy revenues continues
  • Refinancing challenges of GREs continue and will depend on future economic performance
  • Financial transparency remains limited

Main export products

  • Oil & gas (76.3% of current account receipts), investment income (11%)

Income group

  • High income

Per capita Income (USD)

  • 40.760 (2011)

Population

  • 7.5 M

Description of electoral system

  • President: elected by the Supreme Council of Rulers
  • Federal National Council: half of delegates are appointed by the constituent emirates’ government, other half is elected; last September 2011

Head of Federal Government

  • Prime Minister Mohammed Bin Rashid Al Maktoum (since 2006)

Head of State

  • President Khalifa Bin Zayed Al Nahyan, Ruler of Abu Dhabi (since 2004)

Country risk assessment

UAE benefited relatively from the regional political unrest

The political unrest that has hit the Middle East and Northern Africa since early 2011 seems to have had  no impact on stability in the UAE, which comprise the emirates of Abu Dhabi, Dubai, Sharjah, Ajman,  Umm al Qawain, Fujairah and Ras Al-Khaimah. The country did witness limited domestic political criticism – which is however significant as this was unprecedented. Dozens of Islamist activists have been detained last summer, and it lacks meaningful democratic institutions. However, political opposition fails to get off  the ground in the UAE. Limited protests and opposition are explained by the popularity of the ruling   families and the distribution of oil wealth among the population through high public sector salaries and handouts, while it should be noted that only ten to twenty per cent of the population are estimated to be UAE citizens. The UAE has also been able to benefit economically from its relative stability during the past year and a half’s regional “Arab Spring”, as it is perceived as a regional safe haven and a more stable destination than other traditional business, investment and tourist destinations for Arabs.

However, international tensions over Iran’s nuclear program and events in Bahrain that led to the invasion  of Emirati troops in the island last year demonstrate that the country is not immune to geopolitical tensions. At the same time, the UAE has strong relations with the members of the Gulf Cooperation Council and with Western allies – US forces are utilizing its facilities – for whom the UAE’s strategic location next to the Strait of Hormuz is important. Hence, if Iran’s January 2012 threat of blocking the Strait of Hormuz materialized, which seems rather unlikely, the UAE would be helped by international partners to keep the strategic Strait open. Moreover, the UAE recently brought into use its Habshan-Fujairah oil pipeline, which enables Emirati oil to bypass the Strait of Hormuz and should effectively reduce dependence on the Strait  of Hormuz for oil exports, with a planned capacity of more than half of the country’s oil exports.

The Ruler of the emirate of Abu Dhabi is the president of the federation. Abu Dhabi is holding increasing political authority, based on its significant financial capacity, supported by important energy resources. As the emirate houses the majority of the UAE’s energy reserves, Abu Dhabi has created the largest sovereign wealth fund in the world, the Abu Dhabi Investment Authority (ADIA). Abu Dhabi’s government revenues represent almost two thirds of the consolidated government revenues of the UAE and since it had to step in with financial support to Dubai’s ailing government-related entities (GREs, see below) in 2009, it has succeeded in increasing its political influence in the federation.

Energy resources present strong basis for economic performance in periods of high energy prices

Economic activity in the UAE is mainly located in Abu Dhabi and Dubai and is supported by strong oil and gas revenues. Both emirates together hold about 98% of the country’s proven oil reserves, the world’s  sixth largest reserves. In 2010, oil and gas production accounted for 30% of the UAE’s GDP. Most of the   oil resources are held by Abu Dhabi, while Dubai’s economy is more diversified. The UAE saw an average real GDP growth of 9% between 2003 and 2008, but its economy was hit by a severe contraction of more than 3% in 2009. This resulted from the fall of oil prices, which started in the second half of 2008, and from a severe debt crisis related to Dubai’s highly-leveraged government-related entities. Since then, oil prices and trade have recovered and growth picked up again in 2010, although at less than 1%. 2011 however saw robust economic growth of almost 5%. This performance was supported by high oil prices and a rise   in oil production as a response to the shutdown of oil production in Libya, but also strong activity in non- hydrocarbon sectors, particularly trade, manufacturing, logistics and tourism. The performance of these sectors could offset continuing weaknesses of the construction and real estate sectors. The UAE is thus benefitting from the diversification of its economy it has long strived for. After all, the country has evolved into an important regional services hub, with important activities in tourism, transportation and logistics.

UAE2012_Graph1EN

During this and the next year, economic growth (forecast at above 2% this year and expected to reach almost 3% in 2013) is mainly expected to come from non-hydrocarbon sectors as the potential for further stepping up oil production is very limited. As oil and gas revenues remain important for the country, volatile world energy prices could influence the outlook both positively and negatively. An escalation of regional tensions, pushing up oil prices and reinforcing the UAE’s safe haven status is likely to support the   country’s economic outlook. On the other side, a sluggish world economy could not only toughen external financing conditions, but also drag down international oil and gas demand, pushing down prices. And trade and tourism would particularly be affected by an economic slowdown in Asia.

GREs are recovering, but refinancing challenges remain

Up to 2009, Dubai’s government-related entities (GREs) did not only contribute to the emirate’s economic diversification and unrestrained growth, but they were also severely leveraged, mainly financed with short- term loans. The GREs were closely linked to the emir, which inspired confidence in financial markets, but mostly operated without an explicit guarantee of the emirate. Hence, upon the bust of Dubai’s economic cycle, reinforced by the effects of the global financial crisis, these entities became confronted with significant liquidity problems, shaking investor confidence in the emirate and forcing the UAE’s central  bank and Abu Dhabi to provide financial support to GREs that are of strategic importance for Dubai. Since then, a number of debt restructurings have been agreed upon, with more restructurings under way. The IMF valued Dubai’s public sector debt at the end of 2011 at around 92% of the emirate’s GDP, including GRE debt that amounts to almost USD 85 billion or 60% of Dubai’s GDP. Almost a quarter of the GRE  debt will reach maturity this and next year. Hence, the financing needs of Dubai’s GREs remain significant and challenging, particularly given the current volatile external financial environment. However, positive economic growth in the emirate, particularly in the trade, retail sales and tourism sectors, is helping the GREs’ financial situation by supporting asset prices and improving cash flows. Moreover, sovereign and GRE debt are now centrally monitored by the emirate’s Supreme Fiscal Council, which should allow for better risk management. Although the debt of Abu Dhabi’s GREs vis-à-vis its GDP is lower than that of Dubai, this remains high by international standards. Abu Dhabi government’s debt is low however, so that the emirate’s total public debt (including the debt of all of Abu Dhabi’s GREs) is limited to less than half of its GDP. However, Abu Dhabi’s GREs are not immune to debt problems either, as was demonstrated by the substantial financial support the government of Abu Dhabi had to provide to its flagship real estate developer, Aldar. At the same time, the support also showed the commitment of Abu Dhabi towards strategically important GREs.

Strong external position and sound public finances

The UAE has traditionally reported a strong current account surplus and this is expected to continue, supported by high international oil and gas prices. Even when a drop in this surplus was witnessed during the difficult years 2009-10, it remained positive, at more than 3% of GDP, and rebounded strongly to almost 10% last year. It is estimated that the Brent oil price that balances the UAE’s external current account, amounts to about USD 75 per barrel. Such a low Brent oil price level has not been seen since August 2010, despite recent volatility in world energy prices.

Total external debt levels of the UAE as a whole are acceptable, at 41% of GDP end 2011, down from   47% a year earlier. One third of external debt is short term. Its foreign exchange reserves are rather low from a historic point of view, covering 3.9 months of import, compared to 13 months in 2007. However, these figures do not take into account the foreign assets held by the UAE’s SWFs (mostly ADIA). Although the latter assets may not be completely liquid, these would amount to almost 4 times the total external   debt of the UAE, making the country as a whole a net external creditor.

Public spending increasing, but general government debt remains low

The UAE’s consolidated fiscal budget posted deficits in 2009 and 2010, after which its balance returned to positive grounds, at about 3% of GDP in 2011, but has failed to reach the average surplus of 20% of GDP that was seen in 2004-2008. According to the IMF’s calculations, the UAE’s fiscal breakeven oil price – the oil price at which the fiscal accounts are in balance given the level of spending and oil output – has quadrupled in three years, from USD 23 per barrel in 2008 to USD 92 in 2011. This is due to a strong hike in government spending in 2009. The general government’s gross debt (excluding the debt of GREs) in   the UAE remains low however, at below a fifth of GDP in 2011, despite a jump in 2009 to 22.5% from 12.5% the year before.

UAE2012_Graph2EN

Conclusion

The UAE benefits from sizeable oil and gas reserves that are mainly in Abu Dhabi, while its non-energy economy is rather diversified thanks to good infrastructure and Dubai’s well-developed trade and services sector. After the debt crisis that particularly hit the latter emirate end 2009, the country’s hydrocarbon and non-hydrocarbon economic activity has proven resilient and thanks to subsequent current account surpluses and Abu Dhabi’s large SWF, the UAE holds important economic buffers and a strong external position, being a net creditor.

As significant GRE debt is falling due in the coming years, refinancing challenges are expected to remain significant, certainly if international financing conditions were to deteriorate and transparency and public availability of information on GRE debt remain limited. The continuing strong economic performance is expected to relieve the GREs’ financial difficulties somewhat, supported by the country’s status as a safe haven in the region. However, the country remains highly dependent on evolutions of volatile, international energy prices and international trade, elements that are beyond its influence.

Analyst: The Risk Management Team, s.vanderlinden@credendogroup.com