UAE: Green shoots

Khatija Haque - Head of Research & Chief Economist
Published Date: 29 June 2021

 

A much smaller than expected budget deficit in 2020...

The UAE’s budget recorded a deficit of AED -3.0bn (-0.2% of GDP) in 2020, much smaller than we had expected at the height of the pandemic in Q2 2020.  While revenues fell by almost -23% y/y - broadly in line with our forecasts – government expenditure also declined last year, by almost -16% y/y to AED 372.7bn.  The biggest decline was in expenditure on goods & services, which fell -28% compared with 2019, followed by a -26% decline in “other spending”.  However, public sector wages & salaries grew 1.2% last year.  Development/ capital spending fell -9.2% y/y in 2020. 

This year, we have pencilled in a 7% increase in total government expenditure, taking it to AED 397.9bn.  We expect revenues to grow by around 12% on the back of higher oil prices as well as recovery in taxes and fee income and higher enterprise profits. Overall, we expect the budget to post a small surplus of 1% of GDP this year.   

UAE budget was almost balanced in 2020

Source: FCSA, Emirates NBD Research

...did little to offset the impact of the pandemic last year

While the almost balanced budget in 2020 reinforces the UAE’s strong fiscal position, the reduction in public sector spending during the peak of the pandemic would not have helped to mitigate the contraction in the private sector.  Preliminary data show the non-oil sectors contracted -6.2% in 2020 although the non-oil GDP estimate for 2019 was revised higher to 3.8% from 1.0% previously. 

As expected, the hospitality (-23.6% y/y) and transport & storage (-15.5% y/y) sectors saw the biggest contraction in 2020 as international borders were closed for much of Q2.  Wholesale & retail trade GDP declined -13.1% y/y, while the construction and real estate sectors saw their combined output shrink -8.6% in 2020.  We expect all these sectors to recover to varying degrees this year, including the hospitality sector despite the continued restrictions on travel in some key source markets. 

It was not all bad news however: health & social work output grew 6.7% in real terms, while information & communication (4.3% y/y), education (2.8% y/y), public administration (1.7% y/y) and manufacturing (0.2% y/y) also contributed positively to overall economic output.  

The non-oil economy contracted -6.2% in 2020

Source: FCSA, Emirates NBD Research

Green shoots

The UAE’s early and relatively fast vaccine rollout has allowed the economy to remain largely open even as much of the US, Europe, parts of Asia and many other countries imposed tighter restrictions on movement and activity in Q1 21 in response to increased Covid-19 infection rates and the emergence of new variants. Hotel occupancy rates have recovered from last year’s pandemic lows (even as international travel restrictions hamper the return of foreign tourists), private school enrollments in Dubai have increased 3.9% since September 2020 and the number of active mobile phone subscriptions has also increased since the lows last summer. However, these indicators remain below pre-pandemic levels.  Rents and residential real estate prices have also recovered since the start of the year, particularly for larger units, and bank loans to individuals grew at the fastest rate in several years in April. All of this points to a recovery in private consumption expenditure in the UAE, which fell by -12.5% last year.   

The UAE, a global trade hub, has likely also benefitted from the sharp rebound in global merchandise trade in recent months.  The volume of merchandise trade has exceeded pre-pandemic levels as consumers in developed markets have bought more goods, being unable to spend on travel, entertainment and other services due to pandemic restrictions.  We expect the transport and logistics sector in the UAE will be one of the key drivers of the economic recovery this year.  

Annual growth in merchandise trade volumes

Source: Bloomberg, Emirates NBD Research

At this stage, with no official estimates for Q1 2021 GDP, we retain our forecast of 3.5% non-oil sector growth this year, slightly lower than the UAE central bank’s forecast of 4.0%.  However, with oil production likely to rise only gradually in H2 2021, the oil sector is likely to remain a headwind to overall GDP growth this year, which we expect to reach 1.5%.