Country report

UNITED ARAB EMIRATES

Summary
The economy of the oil-rich United Arab Emirates is estimated to grow between 3-4% in 2013.
Diversification efforts are increasing to reduce the dependence on the oil sector. Steady and
continuous revenues from oil exports have resulted in a healthy fiscal position and a strong
external (liquidity) position. The real estate sector in Dubai, which collapsed in 2009, has been
recovering since 2012. The UAE has hardly been touched by the political turmoil in the Arab world,
although youth unemployment is rising and is a source of potential unrest.

Author: Ashwin Matabadal

Country Risk Research
Economic Research Department
Rabobank Nederland

Contact details: P.O.Box 17100, 3500 HG Utrecht, The Netherlands

+31-(0)30-21- 61601
A.R.K.Matabadal@rn.rabobank.nl

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Country report UNITED ARAB EMIRATES

UAE
National facts Social and governance indicators rank / total
Type of government Federation Human Development Index (rank) 41 / 187
Capital Abu Dhabi Ease of doing business (rank) 26 / 185
Surface area (thousand sq km) 84 WEF Global Competitiveness Index (rank) 24 / 144
Population (millions) 7.1 Corruption perceptions index (rank) 27 / 176
Main languages Arabic Press freedom index (rank) 114 / 179
Persian Gini index (income distribution) n.a.
Main religions Muslim (96%) Population below $1.25 per day (PPP) n.a.
Others (4%)
Foreign trade 2011
Head of State (president) K. bin Zayid al-Nuhayyan Main export partners (%) Main import partners (%)
Head of Government (PM) M. bin Rashid al-Maktum Japan 16 China 20
Monetary unit Emirati dirhams (AED) South Korea 14 India 14
Thailand 11 US 8
Economy 2012 India 6 Germany 5
Economic size bn USD % world total Main export products (%) 2012
Nominal GDP 391 0.55 Crude petroleum 42
Nominal GDP at PPP 412 0.49 Re-exports 27
Export value of goods and services 315 1.42 Gas 7
IMF quotum (in m SDR) 753 0.35
Economic structure 2012 5-year av. Main import products (%) 2012
Real GDP growth 3.4 1.4 Machinery & electrical equipment 15
Agriculture (% of GDP) 1 1 Precious stones & precious metals 14
Industry (% of GDP) 56 55 Vehicles & other transport equipment 8
Services (% of GDP) 43 44 Base metals & related products 6
Standards of living USD % world av. Openness of the economy 2012
Nominal GDP per head 52305 477 Export value of G&S (% of GDP) 81
Nominal GDP per head at PPP 55084 426 Import value of G&S (% of GDP) 70
Real GDP per head 29349 354 Inward FDI (% of GDP) 2.1

Source: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without
Borders, World Bank.

Economic structure and growth

The UAE is richly endowed with oil resources and is home to around 10% of the worlds total
proven oil reserves. The UAE consist of seven emirates. Abu Dhabi is the largest and most
powerful, oil-based traditional emirate. Dubai, which lacks oil resources, has a more modern
atmosphere and depends on international retail, tourism and financial services. The other five
emirates have always played a minor role. For almost four decades, oil and global finance have
driven the UAE's economy. The UAE has accumulated substantial wealth, since the countrys per
capita GDP is now on a par with those of leading Western European nations. In regional
perspective, the emirates have, due to successful economic policies, a relatively diversified and
open economy with a 25% share of hydrocarbons in total GDP in 2012.

But the economy's openness made it vulnerable to the global economic crisis of 2008-2009.
Financial services, manufacturing, retail, as well as the hospitality and real estate sectors were
severely hit by the downturn in regional and global growth, especially in Dubai. Dubai's property
market collapsed in 2009. Real estate prices fell by as much as 60% as a result a host of ambitious
projects was mothballed. The real estate market showed signs of recovery in 2012, even though
prices remain below their 2008 peaks. A number of factors contributed to this recovery, including
progress in Dubai on refinancing and restructuring its debt and the regional turmoil, which
bolstered Dubais safe-haven status for foreign investment. Although the UAE emphasizes the
importance of other non-oil sectors for future economic growth, the real estate market remains an
important constituent of the UAE economy. In 2012, the real estate and the business services

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Country report UNITED ARAB EMIRATES

sectors accounted for 10.2% of GDP and construction for 11.4% of GDP in real terms (the latter
also includes large commercial and infrastructure projects). Hence, property market trends will
continue to have a bearing on the UAE's wider economic recovery.

Going forward, we expect oil output to fall and global oil prices to decline, which implies that the
non-oil sector will be the main driver of economic growth in 2013. Also, consumer spending and
investment should hold firm, since the UAE continues to benefit from its relative stability on the
social-political front. Credit growth remains sluggish and is unlikely to increase significantly in the
forecast period. The banking sector in general has remained well-capitalized and profitable, as the
net interest margin has remained comfortable, despite a slight rise in non-performing loans in
2012. Going forward, we believe that UAE banks have worked toward healthier balance sheets,
which should provide for improving credit conditions in the year ahead.

Economic growth is forecast at around 3-4% in 2013, but several downside risks exist. If tensions
in the Middle East, such as the conflicts in Syria, Yemen or between Israel and Iran, would
escalate, the drop in consumer and investor confidence would negatively affect trade, tourism and
foreign investment in the UAE. More broadly, sluggish economic growth in the US and lingering
eurozone crisis will subdue global oil prices. Also, UAEs largest export partners are Japan, South
Korea and Thailand, which are all dependent on exports to the US and Europe. Falling demand
from the US and Europe, will therefore, in turn, reduce Asian demand for UAEs exports.

Figure 1: Growth performance Figure 2: Social & governance indicators

% change p.a. % change p.a.
6 6

4 4

2 2

0 0

-2 -2

-4 -4

-6 -6
08 09 10 11 12 13e 14f

Overall economic growth

Source: EIU Source: See factsheet

Political and social situation

Historically, the UAE has one of the most stable political systems in the wider Arab region. The
federation has maintained stability since unification in 1971. Even though the political system is
inflexible and characterized by an almost complete lack of political freedom, there have been no
reports of imminent upheaval since 1971. Political parties are not permitted, the President is
Khalifa bin Zayed al-Nahyan. The distribution of power between the emirates and the federal
government is hardly contested, with the overall balance of power firmly and increasingly tilted in
Abu Dhabis favor due to its relative large size and wealth, but latent rivalries between and within
individual emirates do exist. Government institutions may change, but society will remain
overwhelmingly tribal and dominated by clans and patronage.

The UAE has hardly been touched by the political turmoil in the Arab world. The economic and
social factors that have contributed to the unrest elsewhere in the region are less pronounced in
the UAE. With more than 80% of the labor force consisting out of expatriates, the countrys small
national population of less than one million enjoys a high living standard in a - from a regional
perspective at least - relatively open and tolerant society. Nationals enjoy financial advantages

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through generous social security and housing programs. But unemployment among nationals is
high, estimates hover around 20% of the national labor force, especially among the youth, and
concentrated in the smaller Emirates. Emirization of the labor market is thus a high political
priority. The income disparity (millionaires vs. underpaid migrant workers) is extremely wide and a
potential source of social tensions.

The UAE government has not been outspoken on the Arab Spring protests in the region. There is
no doubt the government is concerned about the potential longer-term fallout, not least given the
heightened tensions in Bahrain. With regards to Bahrain, the UAE has similar fears as Saudi Arabia;
it not only fears the possibility that a Gulf monarchy could be overthrown, but also the possibility of
a Shi'a state emerging on the Gulf that could serve to boost Iran's sense of influence and power in
that area. Yemen's continued descent into political turmoil is another major concern for the UAE
due to Al-Qaeda's resurgent presence in the country. The UAE will likely continue to take pro-active
measures to mitigate domestic social tensions, while aligning its regional response with that of its
fellow Gulf Cooperation Council (GCC) countries.

Economic policy
The general focus of the UAEs economic policies is to diversify the domestic economy and support
economic growth. The UAE sees its status as a trade and tourism hub as vital to economic growth,
especially since the focus has shifted somewhat away from real estate. Dubais government
recently announced the resumption of projects worth USD 1.1bn that had been postponed in 2009
after the burst of the real estate bubble. The government also announced plans to develop a mega-
project entitled Mohammed bin Rashid City, which will boast the world's largest shopping centre
and 100 hotels. Abu Dhabi will also spend heavily on large-scale infrastructure projects such as the
Khalifa Industrial Zone Abu Dhabi (Kazid) and Masdar City. Diversification and rapid growth in
electricity usage will put pressure on gas supplies, encouraging the government to forge ahead
with the development of alternative energy sources. As part of this effort, it has awarded a license
to build the first of four 1,400-mw nuclear reactors. While the UAE will continue to diversify its
economy away from oil, it will also invest in increasing oil output in the longer term. The federal
government will, furthermore, continue to improve the business environment to encourage foreign
investment. A concentrated effort will be made in the forecast period to expand employment
opportunities for Emiratis in the private sector, although public-sector wage increases will
undermine efforts to entice Emiratis away from public-sector jobs.

Figure 3: Public finances Figure 4: Interest rates and inflation

% of GDP % of GDP % %
14 14
60 16
12 12 12
40
8 10 10
20
4
8 8
0 0
6 6
-4
-20
-8 4 4
-40
-12 2 2
-60 -16
0 0
08 09 10 11 12 13e 14f
08 09 10 11 12 13e 14f
Public debt (l) Budget balance (r )
Deposit rate Lending rate Interbank rate Inflation (CPI)

Source: EIU Source: EIU

The aggregate fiscal position of the UAE is in healthy shape. The 2013 budget envisages a 6.7%
increase in spending. However, despite increased government spending, the fiscal balance is
expected to remain in surplus (3.1% of GDP) in 2013, as a 7.7% increase in revenues is

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anticipated as well. Abu Dhabi National Oil Companys profit transfers and Abu Dhabi Investment
Authoritys (ADIA) investment income are the most important sources of revenues. Furthermore,
there are no income taxes, while only foreign banks and foreign energy firms pay charges.
Introducing broader taxation (on incomes and a VAT) is still under consideration. Therefore,
revenue levels are largely determined by international oil prices developments. At the level of
individual emirates, non-oil-endowed and indebted Dubai continues to report deficits. These are
decreasing and are compensated by the abundant oil-based surpluses of Abu Dhabi. The minimal
oil price needed to break-even the consolidated budget increased from USD 30 per barrel in 2003
to around USD 92 per barrel in 2013. This higher minimum break-even price reflects much higher
government expenditures and is a risk in the event of declining oil prices. We expect public debt to
decrease to 35% of GDP in 2013 from 40% in in 2012.

Average annual inflation is down from around 12% in the boom years to only 1-2% since the
financial crisis of 2009, as especially easing rental prices kept inflation low. Inflation is expected to
average a modest 1-2% in 2013 as well. Although the decade-long, uncontested and still credible
peg of the UAE dirham to the low yielding USD severely restricts the use of interest rate policies to
steer the economy, the peg provided some degree of economic and financial stability over the past
decades. In 2009, the UAE withdrew from the dollar-dominated Gulf Co-operation Council
monetary union project, due to UAE-Saudi rivalry over the location of the seat of the GCCs central
bank. The present peg is expected to remain in place.

Balance of Payments
The current account is in healthy shape. It has posted an average surplus of 5.7% of GDP in the
past five years and, in 2013, is expected to post a surplus of 5.4% of GDP. The trade balance is the
main pillar of these consistent current account surpluses, with an expected surplus of 18.2% of
GDP in 2013. The UAE structurally records large trade surpluses ranging from 15-26% of GDP due
to its large oil exports. These are supplemented by small surpluses on the income balance (profits
and interest); a surplus of 0.1% of GDP is expected in 2013.The services and transfer balances
show structural deficits, which in 2013 amounted to 9.9% of GDP and 2.9% of GDP, respectively,
due to expatriates (8% of the population) transferring funds to their families abroad. No significant
changes are anticipated in 2013, but a significant and unexpected swing in the oil price or an
accelerated growth slowdown in Asia, the UAE largest export market, represent important
downside risks. The consistent annual current account surpluses are reflected in the stock of official
FX-reserves, which is expected to grow to USD 47bn by end-2013, up from USD 42bn end-2012.

Figure 5: Current account Figure 6: External liquidity

% of GDP % of GDP months %
30 30 6 160
25 25 140
5
20 20 120
15 15 4
100
10 10
3 80
5 5
60
0 0 2
-5 -5 40
1
-10 -10 20
-15 -15 0 0
08 09 10 11 12 13e 14f 08 09 10 11 12 13e 14f
Trade Services Income Transfers Current account Import cover (l) Short-term debt cover (r)
Debt service cover (r ) Total foreign debt cover (r)

Source: EIU Source: EIU

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External position
The external debt of the UAE amounted to 41% of GDP in 2012 and is expected to decrease to
35% of GDP in 2013. Most of the external debt is owed by Dubai, whose high external debt burden
has reached over 100% of its own GDP. Total gross foreign assets of the UAE are difficult to
estimate, as the ADIA does not publish any data, but estimates range from USD 300bn to USD
600bn. With total foreign debt at USD 158bn end-2012, this would result in a substantial positive
net external asset position. Moreover, the net external position of the UAE is projected to improve
further, given the expected continuation of current account surpluses.

The UAEs external liquidity indicators are not as strong as those of many other oil exporting
countries. Official FX reserves cover less than 3 months of imports, but when the foreign assets of
government regulated and owned ADIA are included, the import cover increases dramatically to
around 20 months. Similarly, other liquidity indicators improve dramatically as well. In terms of
ability to pay there is little to fear in the medium term for federal UAE or exposures explicitly
backed by Abu Dhabi.

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UAE
Selection of economic indicators 2008 2009 2010 2011 2012 2013e 2014f
Key country risk indicators
GDP (% real change pa) 3.2 -4.8 1.3 4.2 3.4 3.7 4.7
Consumer prices (average % change pa) 12.3 1.6 0.9 0.9 0.7 1.5 2.5
Current account balance (% of GDP) 7.1 3.0 2.5 9.1 7.0 5.4 4.8
Total foreign exchange reserves (m USD) 31695 26104 32785 37269 42969 47069 50270
Economic policy
Budget balance (% of GDP) 16.8 -12.8 -2.2 3.1 4.4 3.1 3.8
Public debt (% of GDP) 38 57 54 46 40 35 31
Money market interest rate (%) 2.4 0.8 2.2 1.7 1.4 1.5 1.6
M2 growth (% change pa) 19 10 6 5 4 5 7
Consumer prices (average % change pa) 12.3 1.6 0.9 0.9 0.7 1.5 2.5
Exchange rate LCU to USD (average) 3.7 3.7 3.7 3.7 3.7 3.7 3.7
Balance of payments (m USD)
Current account balance 22282 7825 7216 30652 27468 24490 24550
Trade balance 62925 42069 48949 79458 81012 82760 88070
Export value of goods 239213 191776 213510 281602 301348 320720 349830
Import value of goods 176288 149707 164561 202144 220336 237960 261760
Services balance -33827 -27273 -30360 -36791 -40726 -45210 -51690
Income balance 3803 3213 -100 20 -405 90 2240
Transfer balance -10619 -10184 -11273 -12035 -12413 -13150 -14070
Net direct investment flows -2100 1280 3485 5501 5700 5400 5560
Net portfolio investment flows -57794 -7549 -14020 -17319 -15700 -14200 -12100
Net debt flows 28238 8392 3391 3881 2617 2610 1580
Other capital flows (negative is flight) -36170 -15539 6609 -18231 -14384 -14200 -16390
Change in international reserves -45544 -5590 6681 4484 5700 4100 3200
External position (m USD)
Total foreign debt 140639 149031 152422 156302 158919 161530 163110
Short-term debt 45560 30952 33343 35223 36090 38200 41180
Total debt service due, incl. short-term debt 49596 63374 46278 56721 60404 64290 67640
Total foreign exchange reserves 31695 26104 32785 37269 42969 47069 50270
Key ratios for balance of payments, external solvency and external liquidity
Trade balance (% of GDP) 20.0 16.2 17.2 23.5 20.7 18.2 17.1
Current account balance (% of GDP) 7.1 3.0 2.5 9.1 7.0 5.4 4.8
Inward FDI (% of GDP) 4.4 1.5 1.9 2.3 2.1 1.9 1.8
Foreign debt (% of GDP) 45 57 54 46 41 35 32
Foreign debt (% of XGSIT) 55 71 67 52 49 47 44
Debt service ratio (% of XGSIT) 19 30 20 19 19 19 18
Interest service ratio incl. arrears (% of XGSIT) 2 3 2 2 2 2 2
FX-reserves import cover (months) 4.2 2.0 1.5 1.6 1.6 1.7 1.7
FX-reserves debt service cover (%) 64 41 71 66 71 73 74
Liquidity ratio 139 115 119 124 123 123 122
Source: EIU

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