United Arab Emirates

We expect the real economy to gain from enhanced oil liquidity and supportive government policies, despite the fact that higher interest rates and slower growth in external demand may impact performance in several sectors, particularly construction and real estate.

Credit demand has increased following negative growth in 2020, and businesses remain optimistic about the UAE's economic outlook. This trend appears to be continuing, albeit at a slower rate, as China's reopening offsets sluggish demand in several big developed economies. According to the central bank's credit-sentiment survey from the first quarter of 2023, borrowing demand has leveled off but remained solid despite a 5pps increase in the policy rate since early 2022. The total UAE PMI increased by 0.6 points to 56.6 in April (a score above 50 indicates positive forward sentiment in the private sector); the PMI in Dubai, the UAE's primary business hub, reached an eight-month high of 56.4 in April 2023, up 0.9 points from March.

Difficulties in the US and European banking sectors may spread to local banks and the overall economy, given the size of the financial industry, whose assets equal roughly 220% of GDP, and the interconnections between the government and government-related entities (banks and non-banks with at least a 20% government stake), whose debt equals roughly 75% of GDP. Large sovereign net foreign assets are still greater than the entire banking sector, but the impacts of even a partial rescue would be visible, given the financial industry's disproportionate size in contrast to the rest of the economy.

The banking sector is evenly split between banks based in Dubai and those based in Abu Dhabi. High leverage, a favorable oil price and the sale of minority investments by individual emirates are expected to prevent debt from increasing further after the 2019-2020 build-up. However, the growing emphasis on generating financial returns from such businesses by individual emirates limits the possibility for deleveraging. On the other hand, the support record of various UAE governments with respect to associated firms demonstrates the UAE's vast non-oil industry and widespread use of directed lending to promote development at the emirate level.

Abu Dhabi remains the UAE federation's primary financial backer, although support should not be taken for granted. Over the last decade, Abu Dhabi's contribution to the UAE federal government has averaged 13% of the emirate's GDP (8% of UAE GDP), or more than 35% of Abu Dhabi's government spending, in the form of direct donations and spending on behalf of the UAE federal government. Since the bankruptcy law went into effect at the end of 2016, government-related firms, including construction conglomerates, special-purpose vehicles and developers, have increasingly entered official restructuring and liquidation processes.