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Sunday, June 14, 2020

Gulf News - UAE economy poised for full recovery in 2022: How will this affect residents and their spending?

By Century Financial in Century in News

Gulf News - UAE economy poised for full...
The UAE economy is expected to stage a gradual recovery to pre-COVID-19 levels in the mid to latter part of 2021, with full recovery expected only by 2022, according to leading economists in the UAE. Normalisation of economic growth in the UAE will be closely tied to the fortunes of the global economy and the fate of oil markets.

The recovery is likely to be very gradual in nature. This is because the UAE economy is highly intertwined with other major developed and emerging market economies. The UAE relies heavily on inbound trade and tourism revenue to fill up its coffers.

“For the scenario of a post-lockdown recovery, the recent macroeconomic picture coming out of countries like China and some parts of Europe indicate worrying trends. The global population has now turned extremely cautious in order to halt further spread of the virus. Previous optimistic estimates for a sharp V-shaped recovery have been further superseded by expectations of a U-shaped and even worst case L-shaped recovery,” said Vijay Valecha, Chief Investment Officer, Century Financial.

Growth estimates

The UAE economy is expected to contract this year with the latest International Monetary Fund projections estimating -3.5 per cent real GDP growth for 2020. This is against a growth rate of 1.5 per cent seen last year.
2019 itself was not a particularly strong year for UAE growth, with real GDP rising by just 1.7 per cent. “A recovery back to this level may well be possible but it would still fall short of average growth rates over the last few years which have been in the 2 to 3 per cent range. A return to these rates of growth will probably require both the domestic and the external economies to be firing strongly,” said Tim Fox, Executive Vice President, Group Chief Economist and Head of Research at Emirates NBD.

Government stimulus comes to the rescue

Besides COVID -19, there are other negative factors at play weighing on the UAE economy, such as low oil prices and a strengthening currency. However, continued government stimulus, a gradual easing of the lockdown, the upcoming Expo in 2021, etc., will eventually help the economy to revert to its pre-COVID levels by sometimes towards the end of 2021, according to Anita Yadav, Partner at Aspire Capital.

The UAE central bank has so far rolled out stimulus measures worth about 18 per cent of GDP. Of the Dh100 billion worth of monetary stimulus announced so far, majority of the funds have been earmarked towards SMEs as well as consumers. Emirates like Dubai and Abu Dhabi have announced individual fiscal packages in addition to the Dh16 billion stimulus announced by the UAE cabinet for all seven emirates. In total, the combined size of all the stimulus programmes now exceeds Dh120 billion, said industry sources.

“These measures will go a long way in supporting economic recovery. Going forward, various other regulatory bodies like free zones authorities can probably reduce the overall cost of business for its members. The Dubai Free Zones Council has already announced a host of measures to support Dubai’s recovery. Similar measures are required to be implemented by free zones in other emirates too,” suggested Valecha.

Measures to halt expat exodus

Yadav recommended additional steps that could assist in GDP recovery:

a) Easing rules for foreign investors’ participation in local businesses;

b) easing residency rules further;

c) encouraging faster growth of the private sector.

“Easing residency laws to allow expats who have lost their jobs to stay here longer will assist in halting the exodus,” she told Gulf News.

In order to protect its expat resident base, UAE authorities can probably look at incentivising consumers with additional discounts on utilities bills and federal fees.
“As per latest estimates, the UAE could see its expat population depleted by 10 to 15 per cent. Since the start of the pandemic, around 10 per cent of all employed Indians living here have expressed their desire to return home. This is apart from expats of other nationalities like Pakistanis and Egyptians who are expected to return to their home countries,” Valecha pointed out.
Economists expect at least six to 12 months for household spending in the UAE to return to normal. Spending patterns are also expected to change post COVID-19. “Spending on international holidays and group entertainment will reduce while spending on technology will increase,” reckoned Yadav.

Reliance on global recovery

Domestic demand in the UAE will not be able to recover fully until overseas demand starts normalising. Various sectors of the UAE economy like trade, tourism, real estate, leisure, hospitality and domestic manufacturing rely heavily on inbound and outbound flows.

UAE industries poised to recover first


UAE sectors with more pain in store


“Since the UAE is a very external-facing economy, the global recovery is critical for the country to see a resurgence in economic activity. This crisis stems from a health pandemic. The discovery of a vaccine is key to a recovery to pre-COVID levels. With an easing in lockdown measures both domestically and globally, we can see some improvement in economic activity from the lows of April,” said Monica Malik, Chief Economist, Abu Dhabi Commercial Bank.
Even the postponed Expo in 2021 will need international trade, global travel and tourism and oil to pick up. “It seems likely that these sectors will take longer to normalise, as might domestic consumption should jobs start being cut. Government spending may also be restrained in the context of a much bigger budget deficit this year,” explained Fox.

Oil’s role in economic recovery

Oil revenue is the UAE government’s main source of revenue and therefore any recovery in oil prices will boost the government’s ability to maintain high level of continued stimulus and therefore aid in economic recovery.

“With the world’s seventh largest proven crude oil reserves, the UAE continues to be a dominant player in the global energy space. Oil exports account for around 25 per cent of the UAE’s overall exports. As such, the economy’s fate is not just linked to overseas trade and tourism but also with oil prices. The current recovery in oil price bodes well for the UAE economy. WTI and Brent prices have both rallied by 100 per cent from their YTD low levels. This is likely to support domestic manufacturing as well as SME sectors’ growth,” added Valecha.
How’s this crisis different from 2008-09?
The difference between the current crisis and the one in 2008-09 is that last time, the banking sector was a problem, whereas this time the banking sector is part of the solution, according to Anita Yadav. “Banks are being encouraged to support SMEs and retail clients now whereas last time, it was generally the banks that needed to be saved.”

The 2008–2009 crisis began with a slump in US markets which later percolated globally towards the consumer side of economies, resulting in a massive demand side slump.

“This time, however, social distancing requirements are likely to cause major entities in manufacturing and service sectors to operate at a reduced capacity. This will affect the supply side of the market. A complete balance between demand and supply will only happen once the global curve flattens and a vaccine is available,” said Vijay Valecha.

Source : Gulf News