Previous Quarterly Editions
Expropriation Risk: 38 40 40 40 ►Political Violence Risk:35 35 35 35 ►Terrorism Risk:38 36 36 34 ►Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:15 26 26 26 ►
TREND ►
Protest intensity to date* 2022 2023 Low Low Unrest risk in 2024**Cost of living: MediumAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
The United Arab Emirates (U.A.E.) economy has recovered well from the COVID-19 pandemic and has a positive outlook. The IMF projects that GDP growth in 2023 will be 3.6% — down significantly from last year’s level due to OPEC cuts in crude oil production but still a positive outlook for the country. Importantly, as the U.A.E. continues efforts for a long-term transition away from reliance on hydrocarbons, non-hydrocarbon areas are growing, and the International Monetary Fund (IMF) projects 3.8% growth in the non-hydrocarbon sector this year. The currency is pegged to the U.S. dollar and is stable, and Consumer Price Index inflation is projected at 3.4% for 2023.
In June 2023, the IMF projected the U.A.E.’s gross general government debt at 29.8% of GDP for 2023 — continuing a decreasing trend since 2020. Like many other countries, the U.A.E. provided significant stimulus and relief funds to help businesses and individuals cope with the pandemic, but the U.A.E. had resources available and has continued to engage in structural economic reforms. The U.A.E. also has an ambitious plan to reach net-zero emissions by 2050, reflecting both the need to transition away from economic reliance on hydrocarbons and to respond to the climate crisis.
The U.A.E. has sufficient resources to avoid its own debt crisis. Furthermore, more than 80% of the country’s residents are expatriates, so the social contract relies on providing benefits to a relatively small Emirati population and employment and business opportunities to expatriates. The country’s demographics therefore blunt the potential political impact of debates over government spending.
To the extent that political tensions exist regarding fiscal policy and public debt, such concerns are usually kept within the small circle of decision makers. In May 2022, Mohammed bin Zayed Al Nahyan became the president of the U.A.E. as well as the official ruler of Abu Dhabi. Demonstrating that political and economic decision making in the country is held primarily by royal rulers, he has appointed his son and brothers to top-level positions on economic policy bodies and sovereign wealth funds. Similarly, in Dubai, the royal family also dominates policymaking.
Abu Dhabi controls much of the political environment in the U.A.E., though Dubai is an important economic and political player. Abu Dhabi holds most of the country’s oil wealth and thus is the primary contributor to the federal budget. Dubai helps to diversify the country’s economy, bringing in extensive foreign business and investment and serving as a global trade hub. During the financial crisis of 2008 to 2009, Abu Dhabi financially bailed out Dubai and has maintained the upper hand in intra-emirate politics since then.
Expropriation risks are very low. The U.A.E. leads several other Gulf countries in pursuing foreign investment as part of efforts to diversify its economy and expand domestic capital markets.
Additional initial public offerings are expected in Abu Dhabi this year. The rush is part of a broader regional competition with Saudi Arabia for foreign investment. This policy, spearheaded by national corporate champions, further suggests very low expropriation risks within the U.A.E.
The country also has worked to attract high-net-worth individuals. Last year, the Dubai International Financial Center announced that it would open a new Global Family Business and Private Wealth Center, which includes a strong focus on high-net-worth individuals. The U.A.E.’s policy of attracting foreign investors, global talent and high-net-worth people further militates against expropriation risks.
There is regulated space for citizens to lobby the government. The government classifies all forms of anti-state dissent as terrorism and is likely to increase surveillance of residents amid strengthening ties with Israel and the resurgence of the Taliban in Afghanistan.
The government will watch for any Islamist organizing. In parallel, Abu Dhabi, through the federal budget, will continue to provide fiscal transfers to the less-developed northern emirates, to pre-empt any social instability over wealth disparities.
The U.A.E.’s intelligence-sharing with regional allies and its well-paid security forces and stringent vetting, alongside its strong civil surveillance, reduce the risk of successful terrorist attacks. Huthi forces targeted Dubai and Abu Dhabi with missile and drone attacks in the first half of 2022. Today, conflict in Yemen continues but at a less intense level than previously.
In March 2023, China brokered a rapprochement between Saudi Arabia and Iran, which offers some hope for de-escalating the conflict in Yemen, which, in turn, could improve U.A.E. security. The U.A.E. government welcomed the resumption of diplomatic relations between Tehran and Riyadh, which has the potential to improve regional security. Meanwhile, the U.A.E. and Iran also have improved bilateral relations, including Iran appointing an ambassador to the U.A.E. in April after a seven-year gap in representation; however, the government knows that de-escalating tensions with Iran is uncertain and will continue efforts to ensure the country’s security.
The Abraham Accords’ sensitivity (the deal was signed between Israel, the U.A.E. and the United States in 2020) means Abu Dhabi will continue strengthening its intelligence capabilities, emphasizing cybersecurity and artificial intelligence-powered surveillance.
The U.A.E.’s development model is based on openness to global capital, so the risk of capital controls or to the repatriation of profits is very low. The government’s robust reserves support this orientation, also providing confidence in the country’s ability to maintain its currency’s peg to the U.S. dollar. Inflation is under control; an IMF report from June projected inflation at 3.4% for 2023.
There is some trade sanctions risk: Dubai is a transit point for weapons and drugs smuggling by criminals and militants based in South and Central Asia, East Africa and the Middle East. The United States repeatedly has chastised the U.A.E. for hosting individuals and entities that assist Iran and Russia in circumventing sanctions. On January 30 to February 1, 2023, Brian Nelson, the U.S. undersecretary for terrorism and financial intelligence, visited the U.A.E. to encourage it to improve sanctions compliance. The United States has sanctioned a number of entities based in the U.A.E. In recent months, the U.S. Treasury has noted concerns about illicit dealings to support Russia and the Wagner Group flowing through the U.A.E.
“Dirty money” flows are another concern, but the country is making progress. In March 2022, the Financial Action Task Force (FATF) placed the U.A.E. on its “grey list” of countries that are assessed to have “strategically deficient” frameworks for anti-money laundering and countering the financing of terrorism; however, in July, the FATF reported significant improvement in the U.A.E.’s approach to combatting money laundering and terrorist financing.
A new U.A.E. corporate tax will start being applied to companies from the beginning of a financial year that starts on or after June 1, 2023, at a rate of 9% on taxable income. The tax is part of broader reforms to gradually transition away from reliance on hydrocarbons and ensure long-term fiscal stability.
Overall, the U.A.E. has low sovereign default risk. In June, the IMF reported that the country’s economic growth was strong. The IMF projected the U.A.E.’s gross general government debt at 29.8% of GDP for 2023. Fitch recently estimated consolidated U.A.E. government debt at 31.4% of GDP for 2023.
In July, Fitch affirmed the U.A.E. federal government’s AA– rating and projected a budget surplus of 4.6% of GDP for 2023. With a break-even oil price of US$62 per barrel for 2023 to 2025, according to Fitch, the country is well positioned for moderate oil prices, though it remains overly reliant on oil revenues.
AA-rated Abu Dhabi enjoys positive credit ratings by the main rating agencies, owing to its strong financial buffers and low government debt. In May 2023, Standard and Poor’s affirmed its AA rating for Abu Dhabi; however, the economy’s concentration in hydrocarbons is a downside risk, as it makes growth and revenue strength vulnerable to the likely long-term decline of oil prices.
Dubai’s model of credit-fueled development and its much smaller oil and gas reserves mean that it is far more indebted than Abu Dhabi; however, the implicit guarantee that Abu Dhabi would shore up Dubai’s liquidity ensures that sovereign default risks are contained.
The economically smaller emirates take varying approaches to fiscal policy, while lacking the oil and gas resources of Abu Dhabi and the commercial success of Dubai. In May 2023, Fitch affirmed Ras al-Khaimah’s rating at A; Fitch noted that investments required for a new casino will be a temporary drag on public finances, causing a public sector deficit of 0.1% of GDP in 2023 and 0.2% in 2024, but will benefit public sector finances in the longer term.
Sharjah has fared less well; last year, Moody’s reduced the emirate’s credit rating to Ba1 — junk status. Sharjah’s growing debt is causing concern. The wealthier emirates will continue financial support for the poorer emirates, but the latter might face growing pressure to improve fiscal practices.
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