Oil Prices Rally and the UAE’s Economy: A Close Look

Oil Prices Rally and the UAE’s Economy: A Close Look

The continued rise in oil prices is good news for many countries in the Middle East including the United Arab Emirates (UAE).

Oil sector growth in the Middle East will lead to improved performance in other sectors. This leads to increased investment in non-oil sectors particularly IT, property development, infrastructure, and tourism.

Oil prices have rebounded and are currently hovering at yearly highs. The oil cuts by OPEC seem to be working as prices have risen to the highest rates in the past four months. According to Naveen Sharma, chairman of ICAI Dubai Chapter, the increase in the price of oil will lead to increased investment and more jobs in UAE.

Increase in oil prices often has a multiplier effect on the economy of oil exporting countries. In this post, we will examine how high prices will have an impact on different sectors of the Emirates’ economy.

Investigating the Impact of Rising Prices in UAE’s Economy

The government in the UAE has relied on oil for the past five decades. Oil wealth has been used to fuel the extraordinary growth and development of the country.

Low oil price levels that had persisted from 2014 till 2018 had a negative impact on the revenues and subsequently fiscal spending.

In Dubai, the property market had experienced a mini recession. While the impact was not similar to the 2008 housing market implosion, the real estate market had nevertheless suffered.

Apartment rates in 2017 had reduced by 8.4 percent while the cost of single villas had fallen by 14.5 percent.  

Low oil prices had resulted in reduced economic activity in the region. The purchasing power of people was hurt following a cut in public benefits. This had put downward pressure on the rental property market.

Oil companies and even banks and schools had suffered due to a slump in oil prices. They were forced to cut costs and reduce jobs in the wake of reduced revenues.

While the economy of the UAE has been resilient to oil price impact as compared to other Middle Eastern countries, the economy did decline in the wake of a continuous decline in oil prices.

Deloitte Group’s report showed that UAE’s economic growth had reduced from 4.5 percent in 2014 to 4 percent by 2018.

But the oil prices have been on the rise in the past few months. Experts at Morgan Stanley predict that oil prices could rise to $75 per barrel this summer.

The UAE’s economic growth will most likely accelerate to 4.7 percent by 2023, according to the projections of the Dubai Chamber of Commerce and Industry. The growth will be fueled by increased investment, trade, and manufacturing.

Government’s Incentives to Boost Investment

The economy of the UAE has become relatively diversified thanks to the efforts of the present government.

According to the Institute of International Finance, the relatively diversified economy along with political stability, excellent infrastructure, and high foreign assets are some of the factors that contribute to economic resilience of Emirates.

The introduction of VAT has further diversified regional revenues. The increased revenues have provided stability in the face of volatile oil prices. 

The government has introduced reforms that have reduced the cost of doing business in the UAE. The incentives have been introduced to speed up the development and attract a large amount of foreign capital.

The overseas promotional missions for exploring investment opportunities have been increased to five. These missions will visit 10 countries including China, South Korea, Japan, and the US to strengthen investment and trade ties.

A report by Bloomberg Economic News Agency has highlighted that Dubai, the largest city in the UAE, has become the financial center in the Middle East. Backed by the strong financial infrastructure, the city now ranks in the top 15 financial centers in the world. This has been due to an influx of a large number of foreign firms in the free trade zone. At the end of June 2018, more than 2000 firms were registered in the zone, up by 8 percent as compared to the previous year.

Real estate market in the UAE that has been down due to low oil price levels will likely stabilize in 2020, according to Standard & Poor.

What has been largely ignored is the influence of the consumers in propping up the UAE’s economy. The increase in employment will lead to an increase in transactional activities. This will also lead to a positive impact on the country’s economy.

Recent data from the Emirates NBD Dubai Economy Tracker Index have also found that the non-oil sector in Dubai has continued to rise at a strong pace. All the main sectors of the economy – travel, construction, wholesale and retail – will likely improve due to accelerated improvements in the business conditions in the months ahead.

The net output by non-oil sectors had increased for the 35^th consecutive months in February this year. Continued improvements in business infrastructure due to increased oil revenues will likely result in further improvements in the output of non-oil sectors. Other factors that will likely contribute to an improvement in the private sector output include building a competitive knowledge-based economy, privatizing non-strategic enterprises, and improving the business ecosystem for development of small and medium sized enterprises (SMEs).

Summing it All Up

The UAE is often considered the Switzerland of the Middle East. The country is walled off from the violent political conflicts in the Middle East resulting in a resilient economy.

With the revival in oil prices, the UAE is implementing plans and carving the economic future with increased determination. The country expects to establish its place as the leading financial hub and economic center in the region.

From an investor’s perspective, this is the best time to invest in the Emirates. The property prices are expected to rise with a continued increase in investment levels and economic activities.  The trade and manufacturing sector will experience a cyclical recovery that will likely boost the financial markets in the UAE.  

Views are strictly personal. This Interim Financial Results & News posts or updates includes forecasts, projections and other predictive statements that represent Vtrade's assumptions and expectations in light of currently available information. These forecasts, etc., are based on industry trends, circumstances involving companies and other factors, and they involve risks, variables and uncertainties. The Group’s actual performance results may differ from those projected in these Interim Financial Results. Consequently, no guarantee is presented or implied as to the accuracy of specific forecasts, projections or predictive statements contained herein.

How the Brexit Outcome Will Affect Global Markets

How the Brexit Outcome Will Affect Global Markets

The decision by the Britons to leave the EU during the June 2016 referendum came as a shock to the world of financial experts and leaders alike.

Fast forward three years, and the Brexit is still a hot topic among financial pundits and policymakers.

The UK’s divorce deal with the EU has gone through a lot of deja vu moments. And the drama is still going on. 

Downing Street has voted recently that the negotiations should be re-opened. This has created a lot of obstacles for the British PM Thresa May in ensuring a soft Brexit landing.

Experts predict that there will be a negative effect of Brexit on the global market. That’s why it’s critical that investors and financial experts fully understand the impact of the outcome of the ongoing Brexit trade negotiations. 

Present Relationship between Britain and the EU

Currently, the trade between the EU and Britain is seamless. There are no tariffs and border checks. A firm in Manchester can order goods from suppliers in Munich as easily as they do from London.

The seamless trade allows manufacturers to become part of the pan-European web of just-in-time supply chains.

Food industry particularly benefits from the seamless movement of goods. Retail industries benefit immensely with just-in-time deliveries since there is no need for storing and refrigerating goods at the ports. This translates into a lower price of goods in the market.

Moreover, automotive manufacturers in respective countries benefit from free supply of finished products and parts.

However, this will all change when the UK breaks away from the EU.

There is an urgent need for policymakers on both sides of the English Channel to hammer out an agreement for a soft Brexit landing.

A no-deal will be extremely hard for manufacturers and retailers on both Britain and the EU.

The Impact of a No-Brexit Deal on the UK Economy

Financial experts predict that a no-deal would pose a serious risk to the global financial markets.

The disruptions in the cross-border trade could undermine the confidence of the manufacturer and retail sector in both Britain and the EU. This will have a devastating impact on the economy and financial sector in the respective countries.

In case of a no-deal, goods entering the customs will have to go through checks. There are 405 checks in total for products entering the EU from abroad. These checks will be applied to UK goods that enter the EU when Britain leaves the EU without any deal.

The administrative costs will increase significantly and result in a lot of delays at the borders. This will have a negative impact on the manufacturing and retail sector.

Food and beverages prices could increase as much as 29 percent in the UK while the prices of non-goods such as clothing will increase by about 7 percent.

The service sector will also reel when the UK formally leaves the EU without a deal. British financial companies will lose the ‘passporting rights’ to sell their services to residents in the UK. The clearing and settlements of financial products especially derivatives like swaps, options, and futures will be delayed.

According to the Bank of England, a no-deal Brexit will affect the £29 trillion (about $38 trillion) derivatives contracts and 90 percent of currency swaps.

Increase in the price of goods could result in a slowdown in consumer spending. This will create a drag on the economies in the UK and the EU.

Pricier imported goods would also hit the profitability of businesses that depend on raw material and product imports. This could ultimately have a negative impact on the stock market.

Moreover, the UK airlines would likely no longer be part of the ‘single European Sky’. British airlines such as Easy Jet and others that fly to routes between the UK and European cities will be particularly hit.

The Impact of a No-Brexit Deal on the Rest of the World

EU countries will be affected by the Brexit.

Germany that had faced the risk of a recession in 2018 will be particularly vulnerable to the no-deal Brexit.

Data shows that Germany’s export to the UK amounted to $96.8 billion last year. German car sales were $22.5 billion during the year. 

A no-deal will mean that the UK will have the status of a third country as per the WTO rules. This will likely result in an increase in tariffs by about 10 percent for German cars. The tariff increase will be up to 22 percent for larger vehicles like pick-ups and trucks.

The custom checks at the ports will also disrupt the deliveries. This will result in reduced demand of German cars and also a threat of job cuts.

Automakers in the US would also suffer from a disorderly exit of the UK from EU membership.

Ford Motors have calculated that it would result in a loss of up to $1 billion for the company. 

Due to the grave consequences of Britain leaving the EU without a deal, the IMF has warned that it would have a negative impact on global economic growth. The economic growth will falter and remain a source of pessimism among investors.

The latest report by the World Bank has stated that a no-deal exit is a risk to not just the EU and the UK countries but also to other regions that rely heavily on trade with them. This includes countries in Eastern Europe such as Moldova and also as far as those in North Africa will be affected.

The bank has forecasted that a no-deal Brexit will result in a decrease in global economic growth of about 2.9 percent in 2019. Also, the growth will drop by 0.1 further in 2020.

Future Outlook about Affect of Brexit on the Global Economy

The UK and the EU need to agree on a win-win deal. A disorderly exist will have the potential to create chaos not just in Western Europe but also in the global economy.

While the negative effects are likely to be short term, the adjustment process will create significant losses.

A no-deal scenario would result in significant hardships for companies that benefit from the free flow of goods between the UK and the EU.

Being the fifth largest economy in the world, any negative effect on the economy of the UK will have worldwide repercussions.

Views are strictly personal. This Interim Financial Results & News posts or updates includes forecasts, projections and other predictive statements that represent Vtrade's assumptions and expectations in light of currently available information. These forecasts, etc., are based on industry trends, circumstances involving companies and other factors, and they involve risks, variables and uncertainties. The Group’s actual performance results may differ from those projected in these Interim Financial Results. Consequently, no guarantee is presented or implied as to the accuracy of specific forecasts, projections or predictive statements contained herein.