The oil sector has been the main motor of the UAE’s economy for the past three years, as non-oil gross domestic product (GDP) recovered slowly from the fallout of the 2009 global recession and debt crisis. But Dubai’s winning bid for the right to host the World Expo 2020 is expected to boost economic growth in the country, as non-oil expansion accelerates.

The Expo win is expected to act as a catalyst, boosting the travel, tourism and transport sectors, which could see the UAE’s economy growing by up to 10 per cent a year by the end of the decade, according to analysts.

In October, the Washington-based IMF forecast the country’s gross domestic product (GDP) would expand by 4 per cent in 2013, with the oil sector growing by 3.6 per cent and the non-oil economy by 4.3 per cent.

Revised forecasts

But the Expo win has led some economists to revise upwards their GDP growth forecasts for 2014, with the main drivers being Dubai’s resurgence and the expansion of the non-oil sector. After the announcement, Egypt-based investment bank EFG Hermes upgraded its 2014 forecast for real GDP growth in the UAE to 5.4 per cent from 4.5 per cent.

“Our upgrade is driven by a strengthening investment outlook with the successful bid, although we also see a linked pick-up in consumption,” says Monica Malik, chief economist at EFG Hermes. “We now forecast the UAE to have the second-strongest real non-oil GDP growth in the region after Qatar,” she says, adding that the upgrade also reflects accelerating investment in Abu Dhabi and the wider UAE.

However, not all economists agree with this outlook. Although it acknowledges that the non-oil economy is strengthening, National Bank of Abu Dhabi (Nbad) is forecasting GDP growth to decelerate from 4.5 per cent this year to 4.1 per cent in 2014, due to a slowdown in the oil sector.

While the UAE’s crude production is expected to increase marginally, oil prices are forecast to decline in 2014. The Washington-based Energy Information Administration (EIA) expects Brent crude to average $103 a barrel in 2014, compared with $108 a barrel this year.

Just days before the announcement of the Expo win, Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum approved the emirate’s 2014 budget with the aim of “continuing to stimulate economic growth and accentuating the social services sector”.

The spending plan is 11 per cent higher than the 2013 budget and will contribute to higher rates of economic growth through public spending, said Abdul Rahman Saleh al-Saleh, director-general of Dubai’s Department of Finance.

The 2014 budget envisages spending of AED37.9bn ($10.3bn) and revenues of AED37bn and represents a 43 per cent cut in the emirate’s fiscal deficit. The deficit will be less than 3 per cent of GDP.

Wages account for 37 per cent of outgoings and the government expects to create 1,650 new job opportunities for citizens next year, after creating 1,600 jobs in 2013.

Goods and services expenses and capital spending, grants and support represent 32 per cent of total government expenditure, while 17 per cent is allotted to the completion of infrastructure and development schemes in Dubai.

“[To support the World Expo 2020, Dubai] has begun the preparation for the expansion of infrastructure projects through increased allocations within the budget of 2014 to AED6.4bn, and Dubai plans to maintain the size of its investments in infrastructure through the next five years,” the official Emirates News Agency (Wam) reported.

The federal spending plan by comparison is fairly flat year-on-year and is focused on welfare spending, in particular education. In late October, the UAE Cabinet approved a budget for 2014 of AED46bn, representing a 1.5 per cent increase in expenditure from 2013. The budget, which forms part of a planned AED140bn three-year spending plan, devotes about half the spending to social welfare schemes.

Social spending

The cabinet allotted 21 per cent of the three-year budget to the general and higher education sectors to improve the general and academic excellence programmes in local universities.

About AED18.5bn has been allocated for the government affairs sector to upgrade and increase the delivery of services to citizens locally and abroad, Wam reported. In addition, AED3.7bn has been earmarked for the health sector, AED1.4bn for housing schemes and AED400m for the government’s marriage fund.

The initial budget for 2013 was AED44.6bn, which was passed in the fourth quarter of 2012, but the cabinet approved an additional AED706m in September to help the government complete certain development projects. The federal budget represents about 14 per cent of overall fiscal spending in the UAE. The seven emirates’ local budgets make up the rest, with the bulk going to the largest, oil-exporting emirate, Abu Dhabi.

The spending plan has since been supplemented by a focused investment on social housing. UAE President Sheikh Khalifa bin Zayed al-Nahyan, in his National Day address on 2 December, announced the allocation of AED20bn for funding social and economic projects across the country and increased the housing assistance a citizen gets from the Zayed Housing Programme from AED500,000 to AED800,000.

Sheikh Khalifa also welcomed the recent agreement between Iran and the P5+1 powers over Tehran’s nuclear programme, saying he hoped it would pave the way for a permanent deal “that preserves the stability of the region and staves off tensions”. At the same time, he reiterated the UAE’s sovereignty over three disputed islands in the Gulf occupied by Iran, saying he hoped the issue could be resolved through direct negotiations or international arbitration.

Iran trade

A improvement in relations between Abu Dhabi and Tehran would have a positive effect on the economic outlook for the emirates, especially Dubai. International sanctions against Iran have impacted the historically strong trade between Dubai and Iran.

Threats by Tehran in 2012 to close off the Strait of Hormuz – the bottleneck for exports from the Gulf – created tension between the two countries and led to uncertainty in GCC markets.

“Iran for me is the key risk for the region and particularly Dubai,” said Farouk Soussa, Dubai-based chief economist for the Middle East at the US’ Citigroup, speaking to MEED in September before the nuclear agreement. “If there is an escalation in the conflict with Iran, Dubai stands to lose more than others in the region, at least in the near term.”

Conversely, the emirate stands to gain the most if the nuclear agreement holds. Iran is the UAE’s second-largest market for the export of non-oil goods and re-exports, and its fourth-largest trading partner overall. According to the Federal Customs Authority, the UAE re-exported AED47.4bn of non-oil goods to Iran in 2011, making it the second-largest destination after India at AED52.8bn. Total trade was AED57bn or 6 per cent of UAE trade. The majority of this trade passed through Dubai.

It is too soon to predict the longer-term impact Dubai’s Expo 2020 victory will have on the economy. Many of the investments were already in place as part of the emirate’s Vision 2020 economic development plan and were due to go ahead regardless of the win. However, the victory should add to the government’s confidence in the sustainability of economic growth and spur it to fast-track many of the schemes already in the pipeline. Many commentators also expect the announcement of new high-profile projects on the back of the event.

“The Expo builds on Dubai’s core sectors such as tourism, trade and transport, and will reach well beyond just the Expo site,” says Malik. “The win will especially be a trigger for the development of infrastructure around Dubai World Central, a $32bn economic zone that is being developed as a transport and aviation hub.”

Work on the Expo site itself, for which the government has earmarked $8bn of investment, is expected to start at the end of 2015 or the beginning of 2016, after approval has been granted.

“With the successful Expo win, we estimate real non-oil GDP [growth] for the UAE at about 5-6.5 per cent until around 2015, increasing to about 6.5-8 per cent in 2016-18 and 8-10 per cent in 2019-20,” says Malik.

UK-based bank Barclays has forecast that the Expo win could boost Dubai’s growth to an average of 6.4 per cent a year from 2014 to 2016 and “potentially to 10.5 per cent year-on-year to 2020”.

Possible overheating

While the win will bring many benefits to the UAE economy over the coming years, economists are concerned about the possible overheating of the real estate market.

London-based Capital Economics has also forecast that if tourist arrivals fall back after the Expo, Dubai could face an oversupply of hotel rooms, office space and transport infrastructure. “Dubai’s corporate sector may find that its revenues are weaker than expected,” says Jason Tuvey, an economist at Capital Economics. “This is a particular problem, given that it looks like much of the investment for the Expo will be financed by debt issuance of borrowing from banks.

“A large share of the construction work is expected to be undertaken by government-related entities, whose debts already stand at about 90 per cent of the emirate’s GDP. These were the root cause of Dubai’s crisis in 2009.”

Although concerns around Dubai’s indebtedness have faded over the past year, a large portion of these debts were rescheduled in 2009 and are due to mature in 2015, which could see the debt factor rearing its head during a key time in the preparations to host the World Expo 2020.

Key fact

EFG Hermes forecasts real gross domestic product growth of 5.4 per cent in the UAE in 2014

Source: MEED