Higher oil prices and an increasingly close partnership with Saudi Arabia are shaping the UAE at the end of 2018. Both will have long-term implications.
In December, Opec ministers will meet in Vienna to agree their response to higher oil prices, mainly caused by the announcement that US sanctions are to be reimposed on Iran’s oil industry from November. This will govern talks with non-Opec nations later the same week about the production restraint deal originally agreed two years ago.
Iranian exports were 1 million barrels a day (b/d) lower in September than they were in April. A further 1 million b/d of Iranian crude could be removed from the market by the start of 2019. Oil rose above $85 a barrel in early October in anticipation.
The UAE is keeping its options open. It lifted production to 3 million b/d in October and will have 500,000 b/d of spare capacity by the end of the year.
Higher prices and production will boost the UAE’s oil export earnings by 40 per cent this year, according to the IMF’s annual Article IV report published in September. It forecasts total oil and gas exports in 2019 will be $85bn. That is more than 80 per cent above the figure in 2016.
GDP in dollar terms, estimated to have grown by almost 14 per cent this year, is forecast to expand by more than 5 per cent in 2019. The current account surplus next year will amount to $36bn, 8 per cent of GDP.
These projections show that next year the UAE will shrug off the remaining impact of the 2014/15 oil price slump. But there is more to the recovery than oil alone. In June, Abu Dhabi announced it will implement an AED50bn ($13.6bn), three-year economic stimulus plan that includes action to remove obstacles to private sector investment.
Abu National Oil Company (Adnoc) is preparing to contribute to the rebound with the largest investment programme for a decade. Chief executive Sultan al-Jaber said in October it includes awarding six concessions to joint-venture oil and gas developers; a $45bn investment programme to double refinery and triple petrochemical capacity; and a masterplan calling for more gas production. The goal is gas self-sufficiency.
Increased government and oil industry investment in Abu Dhabi will deliver a welcome boost across the federation. Dubai, despite the challenges of the oil price slump, has retained its place as the region’s leading business centre. In September, it burnished its status as the Middle East’s top tourist destination by announcing plans to increase the number of foreign visitors to up to 25 million in 2025. It is addressing complaints about the emirate’s cost of living with cuts in government fees and a freeze on school fees. Falling rents and real estate prices, meanwhile, are making Dubai more affordable.
Dubai remains one of the world’s most heavily indebted places with the total owed by government and government-related enterprises (GREs) amounting to about $120bn. Debt service will be a burden for the foreseeable future, but not an impediment to further expansion.
Dubai has awarded more new construction contracts so far in 2018 than any other GCC city, although the figure for the year to September was less than two-thirds of the $30bn it placed in 2017, according to MEED projects. Most is associated with Expo 2020, which opens in Dubai in October 2020.
Construction contracts worth more than $160bn have been awarded in the UAE in 2015-18 – the highest figure in the GCC. Up to $50bn-worth of contracts could be awarded in the country annually in the next three years. Only Saudi Arabia could be a larger Middle East project market in this period.
The IMF’s report expressed satisfaction with economic prospects and government policies. It welcomed the introduction of VAT at the start of 2018 and called for more action to bolster government non-oil revenue, including by replacing its system of fees with an integrated corporate tax code.
The IMF’s recommendation that the UAE should create a debt market produced an instant response. On 13 October, a law was introduced to allow the federal government to float sovereign bonds.
New central bank and banking laws are also being prepared, while further reforms to finance industry regulations and supervision are expected.
Partnership with Saudi Arabia
The economic recovery is underpinning the UAE’s increasingly close partnership with Saudi Arabia, the Arab world’s largest economy. The UAE is the most engaged member of the Saudi-led coalition supporting the Yemeni government. It endorsed the peace deal between Ethiopia and Eritrea brokered by Saudi Arabia and signed in Jeddah last month, and is uncompromising about the boycott against Qatar.
Riyadh’s call for international action to halt Iranian interference in Arab states finds exact echoes in Abu Dhabi. UAE Foreign Minister Abdullah bin Zayed, full brother of Abu Dhabi’s effective ruler Crown Prince Mohammed bin Zayed, responded to allegations about the disappearance of Saudi journalist Jamal Khashoggi in October with a declaration of its commitment to the kingdom.
Together, Abu Dhabi and Riyadh are creating a partnership that controls more than 17 million b/d of oil production capacity and up to $2tn in foreign assets. Their armed forces are the best equipped in the Arab world, and they have the largely unqualified support of all five permanent members of the UN Security Council.
The UAE is already probably the world’s most influential small nation, and its status will only continue to rise so long as the world needs its oil, money and a stable safe haven in a troubled region.