Gulf News - UAE economy poised for recovery in 2021: How will this affect residents and their spending?

The UAE economy is expected to recover strongly to pre-COVID-19 levels in 2021, moving up the expected rate of recovery seen during the peak of the pandemic, with steady growth then seen continuing until 2024, rating agencies evaluate. But how does this affect your household spending and your fiscal matters in general? Let's find out. Growth estimates

The UAE economy is expected to contract this year with the latest International Monetary Fund projections estimating -3.5 per cent real GDP growth for 2020. This is against a growth rate of 1.5 per cent seen last year. However, IMF last month opined how the UAE is quickly recovering with the gradual reopening of its economy.

The economic rebound in the UAE is driven by looser OPEC+ production cuts and the Dubai Expo, set to commence in October 2021.

The UAE is projected to witness a robust economic recovery with a growth rate of 4.1 per cent in 2021, according to Fitch Solutions' latest report. The UAE economy grew at 2.9 per cent year-on-year in 2019, up from 1.7 per cent in 2018.

The report, titled "Recovery In Global Growth To Be Bumpy And Divergent," revealed that the UAE is among countries, including the US, South Korea, and Poland, which will achieve a strong economic recovery in 2021. Fitch Solutions expected that the country will maintain an average growth of 4.1 per cent from 2021 to 2024.

In July, Moody's Investors Service expected that the UAE's gross domestic product (GDP) will grow by 4.1 per cent in 2021 after a 5 per cent contraction in 2020.

Government stimulus comes to the rescue

However, continued government stimulus, a gradual easing of the lockdown, the upcoming Expo in 2021, etc., will eventually help the economy to revert to its pre-COVID levels by sometimes towards the end of 2021, economists say/

Government policies have played a major role in normalising the economy. Dubai was recently awarded a “Safe Travel Certification” from the World Travel and Tourism Council, while the UAE ranks third in Covid-19 testing per one million of population.

As the UAE bounces back economically — opening malls, allowing offices to operate, and brings life back on track — it is also actively forming legislation and taking measures to support residents and tourists without halting any of its national projects or plans.

The UAE central bank has so far rolled out stimulus measures worth about 18 per cent of GDP. Of the Dh100 billion worth of monetary stimulus announced so far, majority of the funds have been earmarked towards SMEs as well as consumers. Emirates like Dubai and Abu Dhabi have announced individual fiscal packages in addition to the Dh16 billion stimulus announced by the UAE cabinet for all seven emirates. In total, the combined size of all the stimulus programmes now exceeds Dh120 billion, said industry sources.

Measures to halt expat exodus

Analysts recommended additional steps that could assist in GDP recovery:

a) Easing rules for foreign investors’ participation in local businesses;

b) easing residency rules further;

c) encouraging faster growth of the private sector.

In order to protect its expat resident base, UAE authorities can probably look at incentivising consumers with additional discounts on utilities bills and federal fees.

Economists expect at least six to 12 months for household spending in the UAE to return to normal. Spending patterns are also expected to change post COVID-19.

Reliance on global recovery

Domestic demand in the UAE will not be able to recover fully until overseas demand starts normalising. Various sectors of the UAE economy like trade, tourism, real estate, leisure, hospitality and domestic manufacturing rely heavily on inbound and outbound flows.

UAE industries poised to recover first

• Technology
• Healthcare
• Pharmaceutics
• Leisure
• Energy

UAE sectors with more pain in store

• Aviation
• Tourism
• Retail

“Since the UAE is a very external-facing economy, the global recovery is critical for the country to see a resurgence in economic activity. This crisis stems from a health pandemic. The discovery of a vaccine is key to a recovery to pre-COVID levels. With an easing in lockdown measures both domestically and globally, we can see some improvement in economic activity from the lows of April,” said Monica Malik, Chief Economist, Abu Dhabi Commercial Bank.

Even the postponed Expo in 2021 will need international trade, global travel and tourism and oil to pick up. “It seems likely that these sectors will take longer to normalise, as might domestic consumption should jobs start being cut. Government spending may also be restrained in the context of a much bigger budget deficit this year,” explained Fox.

Oil’s role in economic recovery

Oil revenue is the UAE government’s main source of revenue and therefore any recovery in oil prices will boost the government’s ability to maintain high level of continued stimulus and therefore aid in economic recovery.

“With the world’s seventh largest proven crude oil reserves, the UAE continues to be a dominant player in the global energy space. Oil exports account for around 25 per cent of the UAE’s overall exports. As such, the economy’s fate is not just linked to overseas trade and tourism but also with oil prices. The current recovery in oil price bodes well for the UAE economy. WTI and Brent prices have both rallied by 100 per cent from their YTD low levels. This is likely to support domestic manufacturing as well as SME sectors’ growth,” added Valecha.

HOW’S THIS CRISIS DIFFERENT FROM 2008-09?

The difference between the current crisis and the one in 2008-09 is that last time, the banking sector was a problem, whereas this time the banking sector is part of the solution, according to Anita Yadav. “Banks are being encouraged to support SMEs and retail clients now whereas last time, it was generally the banks that needed to be saved.”

The 2008–2009 crisis began with a slump in US markets which later percolated globally towards the consumer side of economies, resulting in a massive demand side slump.

“This time, however, social distancing requirements are likely to cause major entities in manufacturing and service sectors to operate at a reduced capacity. This will affect the supply side of the market. A complete balance between demand and supply will only happen once the global curve flattens and a vaccine is available,” said Vijay Valecha.