UAE to Diversify its Economy Through Public Debts and Non-Oil Sectors

14 May 2021   |  UAE

The UAE is on its path to economic recovery, following the 7 percent GDP contraction in 2020. As the coronavirus vaccine rolls out more adversely than its neighboring countries, domestic demands have gradually regained their strength.

GDP expects to increase by 3 percent, depending on the global vaccination rollout and coronavirus containment. The forecasted number is due to the worldwide rebound in oil prices and oil production cuts imposed by OPEC+.

Recovering From the COVID-19 Pandemic

Recovering From the COVID-19 Pandemic

Aside from the region's recovery, risks still prevail in business performances, straining several industries ranging from construction, services, and manufacturing that yet to position themselves in pre-pandemic conditions.

The same goes with uncertainties that still puts property markets with volatility. Nevertheless, UAE's construction output hopes to increase by 4.5 percent this year after the deep plunge of 4.2 percent in the first quarter of 2021.

The Central Bank has recently released comprehensive measures providing liquidity to the market in the forms of zero interest rate collateralized loans, capital buffers, lower reserve ratios on demand deposits, and liquidity requirements. The initiatives seek to support businesses and provide ease in trade traffics during the uncertain period.

However, lending conditions remain tight as banks worry about profitability in the domestic market. Domestic banks' concerns are due to the surge of non-performing loans for businesses and consumers in the past year, reaching 7.7 percent by the third quarter of 2020.

Banks have since anticipated further deterioration in asset quality as a repairing measure of expiration cases in loan repayment deferral schemes.

Increasing Public Debts

The UAE-owned entities add up to the increase of public debt burden to 78 percent, manageable by the UAE's Sovereign Wealth Fund assets.

The wealth fund estimates its assets to reach up to USD 1 trillion or about 290 percent of its nominal GDP, facilitating financial buffers to resume fiscal consolidation in the upcoming years and allowing public debt to return to the pre-pandemic level about 60 percent of the GDP by 2025.

The increase of public debt would not affect the UAE's ability to repay, as debt servicing costs remain low.

Diversifying Economy

Relying for almost 50 percent on hydrocarbon income for their GDP, the UAE is attempting to diversify its economy. The State-owned oil companies actively invest in the hydrocarbon industry to increase oil production from 4 million to 5 million barrels per day and expand the overall downstream operations.

At the same time, the government rigorously pushes the economy away from oil by boosting private sector growth and establishing a more knowledge-driven economy in the long term. The UAE's non-oil sectors currently account for 74% of the region's total GDP, making it one of the most diversified economies in the Gulf States.

The UAE highlights its reputation as one of the more attractive investment destinations in the Gulf region, receiving USD 14 billion of foreign direct investment inflows despite the pandemic, thus exceeding outward foreign direct investment by the Sovereign Wealth Fund.

The increasing attractiveness of the UAE stems from its investment-friendly climate, as the government launches relaxation that allows 100 percent foreign ownership requirements.

The government also aims to improve its investment regulations to pioneer the technology sectors and infrastructure further, reducing its reliance on oil and proving its strength outside of the Gulf regions.

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