While other parts of the Middle East are struggling either to maintain political stability or to rebuild economies damaged by regime change and civil unrest, the UAE is enjoying a period of comparative tranquillity. Growth is continuing to recover following the global financial crisis, money is starting to flow through the economy and private sector credit is regaining momentum.

UAE growth forecast

Dubai-based investment bank Shuaa Capital is forecasting gross domestic product (GDP) growth of 4.2 per cent for 2011, up from 2.2 per cent last year and -2.7 per cent in 2009. Other forecasts are more modest, but all show increased economic growth. Riyadh-based Banque Saudi Fransi expects the economy to expand by 3.5-4 per cent in 2011, while Kuwait-based Gulf Investment Corporation (GIC) is forecasting 2.5-3 per cent growth.

Growth in broad money supply is expected to increase, from 7 per cent in 2010, to 12 per cent in 2011 and 14 per cent in 2012, according to Shuaa Capital, while private sector credit growth, which slowed to just 1 per cent in 2010, is forecast to increase to 6.5 per cent in 2011 and 9 per cent the following year. Inflation, meanwhile, remains under control, nudging up to 2 per cent in 2011 from 0.9 per cent in 2010.

The expectations of such a strong recovery in the UAE while so many other economies in the region are struggling, are based on two key factors: political stability and increased oil revenue. Although it has become dangerous to assume that any country in the region is immune from political instability, the UAE is considered to be one of those with low risk.

“Now we have problems in Bahrain and other parts of the Middle East, the UAE stands out as something of an oasis of stability,” says Christian Koch, director of international studies at the Gulf Research Center in Dubai.

The UAE has even benefited from the instability and uncertainty elsewhere. Tourism receipts have grown as regional holiday-makers forego other parts of the Middle East, particularly North Africa, and there has been an inflow of bank deposits from investors seeking a safe home for their capital.

“We’ve seen a jump in deposits in the first quarter of 2011, meaning there has been increased liquidity in the banking system,” says Khatija Haque, an economist at Shuaa Capital. “People are very confident in keeping their money here and there’s been a huge boost to tourism. Those who would have gone to Egypt and perhaps Bahrain, have changed their plans and come to the UAE. There has been an increase in occupancy rates and average spend per room.”

Even the crisis in Libya has had positive consequences for the UAE. Not only has it been one of the countries to boost oil production to make up for lost output from Libya, but in doing so, it has also benefited from increased market prices. Oil earnings are expected to rise to $104.8bn in 2011, compared with $79.3bn last year, while economic growth in the hydrocarbons sector will accelerate to 7.6 per cent from 3.0 per cent, according to Shuaa Capital.

“Abu Dhabi is going to get a huge boost from increased oil production in the first quarter of 2011 and that is likely to continue,” says Haque. “Opec has had to increase production to offset the loss from Libya and global demand is higher too.”

UAE oil production is reported to have climbed to 2.51 million barrels a day (b/d) in March, from 2.31 b/d in December.

Increased oil receipts will have a positive impact across the economy. In 2011, the current account balance is forecast to increase to 37.8 per cent of GDP, from 22.8 per cent in 2010, the fiscal balance to 8.2 per cent from 5.2 per cent, and the trade balance to 75.1 per cent of GDP from 58.5 per cent. Non-hydrocarbons growth, meanwhile, is forecast to reach 2.8 per cent in 2011 and 4 per cent in 2012, compared with 1.8 per cent in 2010.

Revenue increase in the UAE

“There are still downside risks, but the government is in good financial condition, the sovereign wealth fund is doing well, the financial services sector is gradually coming back to normal and the UAE is benefiting from the upturn in global trade,” says Sulayman al-Qudsi, head of economics and strategy at GIC.

Greater revenue will allow the government to loosen fiscal policy after expenditure was cut back in 2010, following the economic stimulus packages given in the wake of the financial crisis. Government revenue is expected to increase from 30.2 per cent of GDP in 2010 to 34.2 per cent in 2011, while expenditure will increase from 25 per cent of GDP to 26 per cent, according to Shuaa Capital. “There will be much more room for additional spending,” says Haque. “We might see an increase in spending in the non-oil sector.”

Nonetheless, there are still vulnerabilities in the economy. The real-estate sector has stabilised after the slump of 2009, but it has not fully recovered. “The construction sector is not doing great and there are still aftershocks of the Dubai default,” says John Sfakianakis, chief economist at Banque Saudi Fransi.

“The debt crisis is not over and, as a result, the real-estate story is still gloomy. The housing and real-estate market is the main issue for the UAE. I don’t think we’re anywhere near to prices picking up.”

UAE state measures

Nor can political stability be taken for granted. The UAE’s GDP per capita is the second-highest in the region at $59,717 in 2010, but the events of recent months have made analysts wary of saying that any of the Middle East states are safe from political upheaval.

The UAE government has taken some steps to preempt protests. An additional $1.6bn has been made available for power and water infrastructure in the Northern Emirates and in March, the government announced a 70 per cent increase in pensions for former employees of the Defence Ministry.

But more can be done. “I don’t think anyone is going to escape without a serious amount of political and economic reform,” says Sfakianakis. “They have to become accountable and transparent. Like all the Gulf countries they face a difficult challenge. The system is very one-sided. We haven’t seen the same kind of scenes as we have in Egypt, but a failure to change could mean these challenges being replicated.”

High unemployment for young Emiratis

Structural challenges in the economy also remain, chief among them are an over-reliance on foreign labour and high unemployment among young nationals. “They have the same problems in the labour market as Saudi Arabia,” says Sfakianakis. “There are the same challenges in finding the right skills and the right level of education within the population.”

The danger is that the return of stronger economic growth will provide a blanket of comfort to the UAE and these long-term challenges will be ignored.