Historical Information
Since the discovery of oil in the 1950s, the UAE’s economy has been highly dependent on oil exports despite many diversification attempts undertaken by the government. Therefore, global oil crises directly impact both the macroeconomic climate in the region and microeconomic indicators within the UAE (Vohra 10). There have been two occurrences of oil-price fluctuations that made a significant impact on the UAE – economic recession of 2009, and oil-price decline in 2014 (Vohra 10). Decreases in oil prices directly impact the country’s budget – when the prices were steady, the state had a surplus in its budget (Vohra 13). In contrast, during crises, the amount of budget deficit became significant.
Dirham, which is the UAE’s currency, has a substantial linkage with the US dollar, and the Central Bank of the UAE (CBU) plays a significant role in maintaining steady exchange rates to USD (CB UAE). One US dollar buys around 3.7 dirhams – this exchange rate has not changed for many years (CB UAE). Crude oil and other goods on the UAE market are also sold in USD, which makes the interest rates in the country be tied to the American market (Kerr).
It also indicates that the CBU is unable to influence inflation in the country significantly. However, CBU’s expansionary and monetary policies have been steadily trying to keep low official interest rates and stable prices.
UAE’s fiscal policies have also been supportive – shortly after the appearance of the 2009 recession, the government bought 10 billion dollars worth of bonds from Dubai to aid liquidity. The government has also been trying to delink its expenditure from oil-price fluctuations, and investments to other sectors have been the primary method (“Less Positive Outlook for the Banking Sector.”). The real estate sector, for instance, is considered a key to the economic growth of UAE, particularly Dubai, thus making the construction sector the primary client of banks – around 30% of loans are accounted to real estate companies (“Less Positive Outlook for the Banking Sector”).
Despite the attempts of the UAE government to mitigate the consequences of recessions, certain sectors have not yet recovered fully. Real estate, tourism, and public finances are among the examples. In 2015, prices for residential property fell down by 12%, affecting the profitability (“Less Positive Outlook for the Banking Sector”). Much of the projects were put on hold and the majority of loans were restructured. Despite lower prices on real estate, not many people are willing to make acquisitions because lower oil prices led to a lesser amount of money in the hands of citizens (Kerr).
The value-added taxes (VAT) on common goods, imposed by the government, also had a deteriorating effect – majority of the population had to cut their expenditure because of the VAT. Banking, while being considered the industry least affected by recessions due to higher revenues because of higher interest rates, are also expected to struggle because of continuous loan restructurings and lower quality of assets (Kerr). On a national scale, the situation is worsened by constant wars in the region and UAE’s spending on the military. These factors, along with the economy’s dependence on oil prices, make the UAE less attractive to investors today.
Because the economic statistics in Dubai and other emirates are not the most transparent, it is challenging to build a clear picture of the history of debt repayments. Dubai had a healthy fiscal balance prior to rapid expansion and economic growth (Nandwa and Al Sadik 54). The recessions adversely impacted the situation, and the CBU discovered that it is necessary to develop sustainable budgetary policies and intervention strategies (Nandwa and Al Sadik 67). Since the first recession, CBU has been trying to support the private sector and government-related entities, providing them with the required financial resources to restructure or to consolidate their loans (Nandwa and Al Sadik 68). Because of such policies, it is less likely that borrowers will renege on their promise to pay their debts.
Quality of Institutions
Doing Business Survey
The World Bank regularly publishes the Doing Business study, which has benchmark scores on each economy of the world. These rankings use ten variables, each of which has several indicators to determine the final score (The World Bank 78).
The output results are two measures – the ease of doing business score, and the associated ranking (The World Bank 78). The score shows how well economies perform in accordance with regulatory best practices, and the ranking compares one country to another (The World Bank 78). The variables used are starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency (The World Bank 79). Each of these topics has two or more related indicators, such as the number of procedures, time to complete, and cost.
Putting the scores of some economy on a timeline shows how the regulatory environment concerning entrepreneurs changes over time. Such information is valuable to investors because it portrays if any long-term ventures are possible in this country. For instance, if there is a lot of fluctuation in the scores, then the environment may not be stable. Similarly, if the scores get better year after year, then, possibly, there are reforms in the country that are targeted to enhance the investment climate. Also, the ratings give a general picture of how easy it is to start and operate a business.
UAE performs reasonably well across all topics and has a high average score. It ranks 16 in the overall rating and has a business score of 80 (“Doing Business in United Arab Emirates”). The country is the most attractive in terms of getting electricity, as it ranks first, but is only 80th in resolving insolvency (“Doing Business in United Arab Emirates”). Topic scores are mostly above 80, with some occurrences of 70 (“Doing Business in United Arab Emirates”). These numbers mean that the UAE stays attractive despite recessions and regional conflicts due to the government’s commitment to open economy and appropriate investment climate.
There have been unsubstantial increases and decreases in each variable, except for paying taxes – there was a decrease of 14.1% compared to the previous year (“Doing Business in United Arab Emirates”). This drop is connected with poor compliance with postfiling procedures (“Doing Business in United Arab Emirates”). Starting a business, dealing with construction permits, protecting minority investors, and trading across the borders are the variables that experienced an increase.
As an investor, it is reasonable to assess all risks, including the uncertainties that may arise if a venture fails. The overall rating of the UAE is appealing, except for getting credit and resolving insolvency scores. Therefore, there are two associated risks – if the project requires immediate additional funding, it may be challenging to find resources because of a lack of depth of credit information. On the other hand, if the project fails, it is not easy to file for bankruptcy.
The World Bank’s Governance Indicators
The Worldwide Governance Indicators (WGI), in aggregate, provide a picture of how well a government exercises its authority. The data is collected from 30 sources and categorized into six indicators – Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption (“Worldwide Governance Indicators: Dataset”). Some of the examples of sources are the Global Integrity Index, Freedom House, and Political Terror Scale (“Worldwide Governance Indicators: Documentation”).
The rankings are determined through a collection of relevant information from data sources and aggregating it using a 3-step process (“Worldwide Governance Indicators: Documentation”). First, the data is assigned to one of the six categories, and the responses are rescaled to the range between 0 and 1. The final step is utilizing a statistical tool called Unobserved Components Model to calculate the weighted average.
The figure above is a graph which accommodates all the WGI for the UAE. Overall, the indicators have been on a stable level with minor down peaks during recessions. Political stability went down between 2016 and 2017, and that might be connected to the government’s decisions concerning military confrontations. Control of corruption became firm at the beginning of the 2000s and has been steady. The freedom of the press, however, has been declining since the 1990s and continues to decline today. When considering all indicators on aggregate, it is possible to see a positive trend because of the variables are slowly rising.
Investors can obtain valuable information from these indicators – in a country where the government is powerful and can provide entrepreneurs with political stability, businesses will prosper because of the absence of adverse external factors. The strict rule of law allows investors to rely on the country’s legislation, calculate the risks and costs associated with complying with the regulations.
Lack of control of corruption, on the other hand, provides investors with uncertainty, because it is not possible to know what to expect in a country where regulations can be overridden with bribery. If the investor wants to utilize the press to learn about the country climate, Voice and Accountability indicator will be useful. If it is low, then the media is managed by the government’s censorship policies, and the possibility of obtaining transparent information is little.
Geopolitical changes directly influence political stability and government effectiveness. For instance, external conflicts such as wars may adversely impact nearby countries. If one country announces that it will wage war upon the second country, such news will lead to domestic instabilities in the latter state. Other indicators have no direct connections, though different factors may discursively influence them. Corruption levels may rise as a result of political disturbance within the country. This, in turn, may lead to degradation in the rule of law and regulatory quality.
Contemporary Affairs
Newspapers have conflicting information on UAE, but generally, the future for the Emirates seems to be favorable. The International Monetary Fund forecasts a slow but steady recovery of the UAE’s economy in 2019 and 2020 (Das Augustine). The Institute of International Finance reports that Expo 2020, which will be hosted by Dubai, will have positive impacts on the GDP growth (Das Augustine). Such an optimistic outlook is also connected with enhancements in the banking sector (Das Augustine). The GDP increase, however, will be kept at low levels despite being steady (Das Augustine). This forecast is associated with low oil prices, which impact foreign investment, tourism, and other significant industries.
The political regime in the UAE is among the most stable in the world. The president Khalifa bin Zayed Al Nahyan has been serving since 2004, and his father had served for 30 years before his death in 2004 (Gulf News Web Report). The news report that the political system in the country is prospering – elections to Federal National Council have recently taken place (Emirates News Agency). The council will consist of 20 men and 20 women, and its primary responsibility will be to represent the people (Emirates New Agency). No posts about political distress or potential rallies have been found. There are two possible reasons – either the UAE is stable in terms of political regime, or the press is too censored.
The most significant external factor that may influence the UAE and neighboring counties is the unsettled affairs in the Middle East. This region has been the center of oil wars and the emergence of terrorism. Any political move concerning this area may have an impact on the UAE’s economy and politics. For instance, the UAE is backing separatists in Yemen civil war, and the consequences are not certain (Mukhashaf and Kalin). Iran, which is attempting to expand its territories to the west, may not be comfortable about the UAE fueling the conflict (Mukhashaf and Kalin). In summary, the geopolitical situation profoundly impacts the economy and the politics of the UAE. Such distress may not only deter foreign investors because of security risks but may also affect oil prices, which directly influence the UAE’s economy.
Overall Assessment
Due to the relatively fixed USD/AED exchange rates, there is not going to be much movement in the foreign-denominated debt of UAE in the near future. The country primarily uses the American dollar for trading operations, and therefore, is not affected by other currencies. Government indicators are also positive, which means the country is politically stable and has appropriate mechanisms to battle corruption.
The news report that the political regime in the country is flourishing, and no posts and rumors on potential political and social imbalances have been found. After suffering the 2014 crisis, banks and real estate firms in the UAE are slowly but consistently recovering. Dubai is set to host a global event in 2020, namely Expo 2020. Collectively, these factors will ensure GDP growth for the next several years. For an investor, such a forecast means that the UAE is suitable for investments, both in terms of buying bonds and financing the private sector.
Despite this positive outlook, however, there are several potential risks associated with investing. The region has been unstable in terms of military and political confrontations for many years. Recently, the UAE decided to take part in such events too. Increasing expenditures on the military may lead the country to a negative debt balance. On the other hand, there is oil with its fluctuating prices. Any significant drop in return-on-investment will lead to instabilities in the UAE market. A substantial number of loans will have to be restructured, and the government will have to spend large amounts of money to aid the private sector. The country’s supportive fiscal policies, however, are able to mitigate the effects of market swings for some time.
Works Cited
CB UAE. Central Bank of the UAE, 2019. Web.
Das Augustine, Babu. “UAE Economy Set for Sustainable Recovery in 2019, 2020.” Gulf News, 2019. Web.
“Doing Business in United Arab Emirates.” Doing Business, 2019. Web.
Emirates News Agency. “UAE President issues decree forming 40-member Federal National Council.”Gulf News, 2019. Web.
Gulf News Web Report. “Sheikh Khalifa bin Zayed Al Nahyan re-elected President of the UAE.” Gulf News, 2019. Web.
Kerr, Simeon. “UAE Banks Prepare for Rough Ride Ahead.” Financial Times, 2019. Web.
“Less Positive Outlook for the Banking Sector.” BNP Paribas, 2015. Web.
Nandwa, B., and A. T. Al Sadik. “Public Debt Management and Fiscal Sustainability.” The Economy of Dubai, edited by Abdulrazak Al Faris and Raimundo Soto, Oxford University Press, 2016, pp. 49-74.
Mukhashaf, Mohammed, and Stephen Kalin. “Yemen civil war: Deadly clashes between separatists and government forces deepens split between Gulf allies.” Independent, 2018. Web.
The World Bank. “Ease of Doing Business Score and Ease of Doing Business Ranking.” Doing Business 2020. World Bank Publications, 2019, pp. 77-86.
Vohra, Rubina. “The Impact of Oil Prices on GCC Economies.” International Journal of Business and Social Science, vol. 8, no. 2, 2017, pp. 7-14.
“Worldwide Governance Indicators: Documentation.” The World Bank, 2019. Web.
“Worldwide Governance Indicators: Dataset.” The World Bank, 2019. Web.