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.  

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