The United Arab Emirates scores well on international and regional comparisons of per capita income, creditworthiness and ease of doing business. Weak oil and gas prices are dragging on government revenues and will pose risks to the outlook. The accompanying fiscal adjustment will add further downside to the outlook. The UAE is a major hub for Australian firms looking to do business in the Middle East and North Africa.
Growth in the UAE has averaged 4.8% over the last four years driven by a pickup in services, real estate and infrastructure spending. But softer oil prices are weighing heavily on the outlook as growth is expected to average 3.1% over the next five years.
Oil is also responsible for 40% of government revenues and the resulting fiscal adjustment to lower energy prices will crimp public spending. Granted while the UAE’s economy is more diversified relative to most other major oil producers, the persistent weakness in emerging market demand and mediocre growth in global trade volumes will weigh on the non-oil economy. But Dubai’s successful bid to host the 2020 World Expo adds some upside to the medium term outlook.
The UAE is a high-income economy with a GDP per capita on par with most advanced countries. But this high level obscures large disparities between the economically weighty emirates of Abu Dhabi and Dubai and the smaller emirates. Consequently, the UAE doesn’t rank as highly on the United Nation’s Human Development Index—a broader measure of prosperity.
The UAE enjoys an investment grade credit rating and a strong OECD country credit grade of 2. This suggests a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual debtors can and do default). Indeed, Dubai experienced severe financial stress in the wake of its 2008-2009 property crash; however it managed to stave off default thanks to support from Abu Dhabi.
The UAE’s business climate comes in at 31 out of 189 economies on the World Bank’s ease of doing business gauge — which measures regulation and red tape relevant to a domestic small to mid-sized firm. It outperforms the regional average on most metrics, although it doesn’t score as highly on contract enforceability. The UAE also has a reputation for slow and lengthy commercial dispute resolution, which probably dovetails with the country’s relatively poor rankings on aspects such as enforcing contracts and protecting investors.
The UAE also scores in the top half on most of the World Bank’s governance gauges. The area is governed by the monarchs of the seven constituent emirates. The Ruler of Abu Dhabi serves as president, and the Ruler of Dubai prime minister. Abu Dhabi’s economic weight tends to give it a dominant role in federal affairs. Most laws are based on Islamic principles.
The UAE is Australia’s 15th largest trading partner and largest export destination in the Middle East. Australian merchandise exports to UAE were worth A$3.3b in 2014-2015, mainly cars, meat and oil seeds. Australia is also an important source of wheat and legumes.
The UAE is a valuable market for Australian car exports, but Toyota and Holden—Australian companies with a significant presence—are facing increasing competition from low cost Chinese producers. Furthermore the closure of Ford, Holden and Toyota in coming years, will halt vehicle exports.
Service exports to the UAE were worth A$633m in 2014-2015. Some 360 Australian companies are based in the UAE, most in the service sector. Many use Dubai as a regional base, taking advantage of its transport, financial and communications infrastructure.
The oil and gas industry also presents opportunities for Australian firms. Gasco was awarded a contract to supply equipment to the Taweelah–Fujairah Gas Pipeline Project. Australian firms have also been involved with the construction of railway networks, the likes of Track IQ, International Transport Training & Development and Rail Skills Australasia providing a range of services.
Education is an area of potential growth as Australian institutions have been active in the UAE market for over 20 years. The University of Wollongong and Murdoch University both have campuses in the UAE. But the number of UAE students studying in Australia remains relatively small at 600 and has fallen significantly since 2009.
The UAE accounts for 0.5% of total tourist arrivals in 2015. However, the relatively well-off population and partnership between Qantas and Emirates offers significant growth potential.
Bilateral investment between Australia and the UAE has risen steadily over the last decade. UAE investment in Australia was worth A$12.5b in 2015. The Abu Dhabi Investment Authority (ADIA), the world’s second largest sovereign wealth fund, has invested heavily in hotels and infrastructure projects. Australia has invested A$2.4b in the UAE, equivalent to 0.1% of its investment portfolio.
Department of Foreign Affairs & Trade