UAE: Miles & More - New Country Views

Date: Oct 2018

New Country Views

"UAE: Miles & More"

A combination of oil and non-oil-based revenue is smoothly driving the economy and helping the government raise spending to boost growth further.

The new 2019 federal budget is a record high both in terms of size and growth. As in previous years, it focuses on social development, education and health.

The adoption of a new Space Law on 30 September underscores the country’s intent to pursue regional leadership in the space sector, as well as compete on a global level.

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Q4 2018 MENA Outlook: Is US Strategy in MENA Wobbling? 

Our quarterly regional theme analyses trade and investment relations between the Middle East & North Africa (MENA) region and the United States (US). It highlights changing US interests in MENA in light of President Donald Trump’s “America First” agenda, the US becoming more energy independent, and the MENA region attracting major new players, China and India.

As of 2010, increased local oil production through fracking has allowed the US to reduce its international dependency on oil, although imports from the MENA region have held up. This coincides with a stronger Chinese presence in the region as Beijing assumes a more active role internationally to promote its Belt and Road Initiative (BRI). China overtook the US to become Saudi Arabia’s largest client in 2005. The Trump administration, however, is trying to refresh the US-Saudi relationship along more political lines.

US policy in MENA has shifted primarily toward resisting Islamist movements and terrorist groups, maintaining its military bases, preventing Iran from assuming a hegemonic role in the region, and upholding its support for Israel. An example of this greater than before interest is the increased US support for Egypt through military aid. For FY 2018/19, Trump requested USD 1.4B in foreign aid to Egypt -- a whopping 85% of it in military assistance. That compared with only USD 100M in 2017 (90% of which was military).

In terms of trade, and other economic, political and social aspects, relations between the US and the UAE remain stable. Over the past decade, US exports to the UAE grew by 87% while imports from the UAE grew by 220%.

But with a China-US trade war flaring and the re-imposition of sanctions on Iran, countries like Bahrain and the UAE could face a dent in their exports, notably aluminium. Others like Saudi Arabia could become net beneficiaries, however, if China succumbs to US pressure and reduces oil imports from Iran.

In short, the US remains a big player in MENA, but not as omnipotent as it once was. The short shrift given by OPEC to Trump’s demand for cheaper oil in mid-September was significant.

Higher crude production and recovering oil prices will aid growth in an otherwise sluggish oil sector and strengthen fiscal and external balances especially for the GCC economies.

Growth in MENA is gradually recovering from last year’s downturn. Real GDP is expected to pick up in 2018 to 3.2% from 2.2% in 2017, but regional conflicts and ongoing fiscal adjustments mean it has remained subdued compared with an average of 3.7% over 2010-2016.

Saudi Arabia’s economy is expected to return to growth this year, and the expansion could well surpass expectations given it raised production in August to 10.4 Mb/d from 10.2 Mb/d in July. The kingdom is on track to achieving or even lowering its budget deficit of 7% of GDP for 2018 overall. This implies positive externalities in other parts of the GCC.

Downside risks to the positive outlook in MENA remain, however, as rising interest rates and tighter monetary conditions could slow down the momentum in the non-oil private sector.

On the geopolitical front, the possibility of a direct conflict between Iran and the US is still remote, but renewed US sanctions on Iranian exports could increase the chances of a miscalculation and raise regional tensions, hurting the overall business, trade and investment environment.

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