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UAE: A mixed bag of data in January

Khatija Haque - Head of Research & Chief Economist
Published Date: 21 January 2021


A strong finish to a tough year for the tourism and hospitality sector

The PMI survey indicated a relatively flat Q4 2020 for the UAE’s private sector with the headline index averaging just 50.1 for the quarter.  However, travel and tourism was a bright spot in December after an extraordinarily difficult year for the sector.  Data from STR Global showed hotel occupancy for the whole UAE rising to 67.4% in December from 56.0% in November.  Hotel occupancy in Abu Dhabi rose to 63.1% in December (61.7% in November) while Dubai saw hotel occupancy surge to 69.1% from 55.8% in November.  While these figures were still lower than December 2019, they mark a significant recovery from the lows seen during the lockdown in Q2 2020.  Revenue per available room (RevPAR) also increased sharply m/m in December, although they too remained below pre-pandemic high season rates. 

With the holiday season over and travel restrictions since tightened in many countries due to surging coronavirus cases, these high figures for hotel occupancy and RevPAR are unlikely to be sustained in Q1 2021.  Depending on how quickly vaccines are rolled out, the outlook is brighter for H2 2021, particularly with Expo 2020 set to start in October 2021.

Dubai hotel occupancy and RevPAR

Source: STR Global, Emirates NBD Research

Budget data show a decline in spending in the first nine months of 2020

Ministry of Finance data showed a -15% y/y decline in total expenditure over the first three quarters of 2020.  Current expenditure in Q3 was more than 10% lower than in Q2 despite the economy gradually reopening from July.  Over January-September, current spending declined -20% y/y, mainly due to lower spending on goods and services, although spending on grants, social benefits and other expenses also decreased.  However, spending on wages rose 5% y/y, subsidies increased 45% y/y and interest expense rose almost 19% y/y in the first nine months of 2020.

Capital spending increased by almost 32% y/y in January-September, although this was largely due to building up of inventories in Q2 and a chunky AED10.9bn investment in “non-produced assets”, which includes investment in developing natural resources such as oil & gas, in Q2 2020.

Budget revenue declined more than -30% y/y in January-September, as oil revenue fell and the government reduced some fees and charges in response to the pandemic. The budget recorded a deficit of AED 32.1bn by end-September 2020, compared with a AED 32.5bn budget surplus in the same period of 2019.

We had expected government spending in the UAE to rise y/y in 2020 as the government stepped up provision of healthcare and other public services in response to the coronavirus pandemic, as well as to support the broader economy as the private sector contracted.  Unless there was a sharp rise in government spending in Q4, this now looks unlikely to be the case. 

As a result we have revised our forecast 2020 budget deficit lower to -4.1% of GDP from -4.7% previously.  We expect the deficit to narrow further to -2.9% in 2021 as revenues recover on higher oil prices and a normalisation in rebound in economic activity particularly in H2 2021. 

Non-oil trade is starting to recover

The value of the UAE’s non-oil trade declined -12.8% y/y over January-September 2020 as the coronavirus pandemic disrupted global trade flows last year.  Exports grew 10.4% y/y while re-exports and imports declined -20.4% and -14.9% y/y respectively over the first three quarters of 2020.  China remained the UAE’s top trade partner in the Jan-Sep 2020 period, although the total value of trade with China declined -6.0% y/y.  Saudi Arabia moved into second place in the top ten trade partners list, as total trade with the kingdom rose 8.4% y/y, mainly on the back of higher re-exports.  India moved from second to third place as the total value of trade with the UAE declined -38% y/y.

The monthly data showed a recovery in the value of trade in Q3 which likely extended into Q4.  We expect global trade volumes to continue to rebound this year as economic activity normalizes, which should also support a rebound in the UAE’s transport and logistics sector as well.

Growth in UAE non-oil trade value

Source: Haver Analytics, Emirates NBD Research

Money supply growth slowed in November…

Broad money supply growth slowed to 5.0% y/y in November after declining -2.4% m/m.  The main driver was a decline in quasi money (fx and longer term dirham deposits) which fell -5.1% m/m and -0.3% y/y. 

Bank deposits declined -1.8% m/m in November, with y/y growth slowing to 3.1%, the slowest since February 2018.  Both residents’ and non-residents deposits fell m/m in November.  While individuals’ deposits grew 0.7% m/m corporate and GRE deposits declined and government deposits in banks were largely unchanged from October.  On an annual basis, individuals’ deposits have grown the fastest at 8.0% y/y, while government and GRE deposits grew more modestly at 5.2% y/y and 5.6% y/y respectively.  Corporate deposits, which account for over 30% of total bank deposits, were largely unchanged compared to November 2019.    

…as did loan growth

On the lending side, gross lending by banks declined -0.6% m/m in November, with the annual growth rate slowing to 4.3% y/y from 5.8% in October.  Lending declined m/m to almost all categories of borrowers, with individuals the only exception.  Lending to individuals increased modestly m/m since June although it remained -1.2% lower on an annual basis in November. 

Total private sector credit growth declined -2.4% y/y in November, the same rate as October.  Public sector credit growth remained high at 19.7% y/y but slowed slightly from October.

Looking forward to a 2021 recovery

Overall, the data released supports our view that the economy contracted -6.9% in 2020, largely due to the impact of the coronavirus on the oil and non-oil sectors.  However, there is reason for optimism.  The bounce in the tourism sector at the end of last year suggests that a broader economic rebound could gain momentum once restrictions on activity and travel are eased.  Depending on the rate at which Covid-19 vaccines are rolled out globally, that could happen from Q2 2021. 

Higher oil prices could allow the government to boost spending to support the economy, and a normalization of activity is likely to boost demand for credit as well, particularly as interest rates are likely to remain low for an extended period. 

We expect the non-oil sector to grow 3.5% in 2021, although headline growth is likely to be slower at 1.9% due to the expected drag from the oil sector.    

UAE GDP growth

Source: Haver Analytics, Emirates NBD Research