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May 30, , by Hugo Erken. The business environment is reasonably attractive, with high quality infrastructure and flexible labour market institutions. In addition, the long-standing and credible exchange rate peg of the Dirham to the US dollar provides economic stability. The non-democratic political system means the large oil wealth is held mainly by the elite; the ruling families, while freedom of speech for proponents of political reform is highly restricted.
The rapid drop in oil prices that began mid will continue to put pressure on economic activity within the UAE economies. At least until , a sharp rebound in oil prices is not be expected, as e. We expect economic growth to slow to 1. In addition, the current account shows deficits as well, suffering from plunging export values as a result of the low oil prices. Oil and gas account for roughly two-thirds of general government revenues.
Among other things, public investment project have been cancelled and energy subsidies have been brought down. The sheer size of these funds is enormous: Second, the UAE is much more diversified than its Gulf peers: The World Expo in Dubai will provide a boost to the construction sector and tourism. More in general, tourism in the UAE will continue to benefit from the persistent political instability in the MENA area, as places such as Dubai are considered relatively safe by both tourists as well as investors.
The lifting of economic sanctions against Iran beginning of this year provides trade and investment opportunities, most notably for Dubai, which poses a relative accommodative stance towards Teheran compared to other Gulf states. Declining oil revenues have dampened the growth of new deposits at banks, while loan growth has continued at a steady pace. In response, some local banks went overseas for funding, increasing their exposure to foreign liabilities.
Nevertheless, banks are still well capitalized and we would expect the government to claw back SWF assets overseas, in case of liquidity or funding problems of banks. However, the anticipated rate hike by the Fed would have to be followed by UAE monetary authorities. Although the higher interest rate would help to somewhat reduce the relatively fast increasing inflation, the appreciation of the Dirham could hurt competitiveness of the non-oil sector, making tourism more expensive and pushing up real estate prices.
However, de-pegging the Dirham is not an option. Although oil revenues and the non-oil sector would benefit from a depreciation in the short term, investors would be spooked, which could possibly trigger substantial capital flight and cause inflation to accelerate at an even higher pace. From a political standpoint, the UAE is one of the most stable Gulf states, with no history of terrorism, homegrown tendencies towards extremism or political disputes whatsoever.
Meanwhile, the UAE will continue its careful balancing act in managing political ties with both Saudi-Arabia and Iran. Resilient, but facing challenges.
Country Risk Report, Q2. The UAE consist of seven emirates. Abu Dhabi is the largest and most powerful, oil-based traditional emirate.
Dubai, which lacks oil resources, has a more modern atmosphere and depends on international retail, tourism and financial services. The other five emirates have always played a minor role. For almost four decades, oil and global finance have driven the UAE's economy. The business environment is reasonably attractive, characterized by high-quality infrastructure, a flexible labour market institutions and beneficial taxation regime.
But the state also has substantial progress to make, with investment in education and training of Emiratis as well as decreasing fiscal vulnerability as the most prominent areas of improvement. Historically, the UAE has one of the most stable political systems in the wider Arab region.
Even though the political system is inflexible and characterized by an almost complete lack of political freedom, there have been no reports of imminent upheaval since Although Khalifa bin Zayed still is president of UAE, crown prince Mohammed bin Zayed has been consolidating his power ever since the president fell ill in Did you like this article?
Could you maybe inform us why you do not like this article? Could you maybe inform us why you like this article? Do you want us to respond to your remarks? If so, please leave your email address below. Oil price well below breakeven Source: IIF, Rabobank Figure 2: Large oil reserves and SWF Source: Factstheet of UAE Source: Economic indicators of UAE Source: Feedback Did you like this article?
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