Previous Quarterly Editions
Expropriation Risk: 38 38 38 38 ► Political Violence Risk: 35 35 35 35 ► Terrorism Risk: 20 20 20 38 ▲ Exchange Transfer and Trade Sanction Risk: 45 35 35 35 ► Sovereign Default Risk: 15 15 15 15 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
As OPEC’s third largest oil producer, the U.A.E. views the growing global pressure on governments to decarbonise their economies as an opportunity for economic diversification and reducing reliance on fossil fuels for both domestic power generation and revenues. Oil income represents more than 60% of central government and export revenue, making hydrocarbons an economic lifeline. Masdar, Abu Dhabi’s state clean energy firm, is owned by Mubadala, the USD243-billion-dollar sovereign wealth fund, giving it financial firepower and positioning Masdar as the region’s pre-eminent cross-border cleantech investor. It is largely through Masdar’s lens the U.A.E. views climate policy, an area where financial return can be generated from investing in the technology of the low-carbon economy, for example, energy storage and electric charging infrastructure.
By regional standards the U.A.E. is a leader in mainstreaming of climate issues on its political agenda. In October 2021, the U.A.E. became the first Gulf state to announce a net-zero emissions target by 2050. It has also submitted updated medium-term climate change plans, Nationally Determined Contributions, under the Paris climate agreement. In April 2021, ahead of the UN-led COP26 international climate summit in Glasgow, the U.A.E. hosted a regional climate dialogue, which concluded with a statement signed by 10 countries from the region committing to accelerate climate action. The U.A.E. also launched a successful bid to host the 28th edition of COP in Abu Dhabi in 2023.
The country has invested heavily in renewable energy in recent years, with Masdar at the forefront of solar power projects, and nuclear power projects also progressing. The U.A.E. authorities hope hosting the COP event will reinforce their country’s credentials in renewable energy, especially solar power. Announcing a net-zero target and playing host to COP28 also illustrates the U.A.E.’s use of the climate agenda to exert soft power internationally. This was especially relevant last year when the U.S. and the UK, the latter which held the COP26 presidency, two of the U.A.E.’s key external allies, placed climate change high on their foreign policy agendas.
The country has invested heavily in renewable energy in recent years, with Masdar at the forefront of solar power projects, and nuclear power projects also progressing. The U.A.E. authorities hope hosting the COP event will reinforce their country’s credentials in renewable energy, especially solar power. Announcing a net-zero target and playing host to COP28 also illustrates the U.A.E.’s use of the climate agenda to exert soft power internationally. This was especially relevant last year when the U.S. and the U.K., the latter which held the COP26 presidency, two of the U.A.E.’s key external allies, placed climate change high on their foreign policy agendas.
The U.A.E. has sought to use the climate agenda to find common ground with the U.S., its security guarantor. Abu Dhabi’s traditionally close ties with Washington have been strained by differences over the Iran nuclear deal and the U.A.E.’s frustration with Washington’s perceived withdrawal from the region. The U.A.E. has therefore held several rounds of consultation with U.S. President Joe Biden’s climate envoy, former Secretary of State John Kerry. At Biden’s leaders’ summit on climate, the U.A.E. and the U.S. launched a multibillion-dollar climate change and agriculture initiative known as AIM (Agricultural Innovation Mission for Climate).
Despite the U.A.E.’s energetic climate diplomacy, renewables still account for less than 1% of domestic energy consumption, indicating that concrete progress has yet to catch up with the UAE’s political announcements. On per capita emissions, the U.A.E., along with other Gulf states, ranks among the top in the world, owing to a hot climate, high living standards, and energy-intensive industries. Further to this, the U.A.E. is forging ahead with its oil and gas expansion plans. In late 2020, the government approved a USD122 billion capital expenditure plan for 2021-25, part of a plan to double oil output by 2030. The plan is intended to stave off a scenario of stranded oil assets by monetising as much of its roughly 105 billion barrels of reserves as soon as possible.
The U.A.E. faces climate change vulnerabilities due to rising temperatures and sea levels and the impact of higher temperatures on the global food system. Critical water desalination and energy infrastructure located along the coasts is especially vulnerable. The U.A.E.’s water scarcity and dependence on food imports mean it is especially sensitive to disruptions in global food supply chains. However, such risk hardly factors into the U.A.E. leadership’s calculus around the economic drive to exploit the country’s hydrocarbon wealth.
TREND ►
Expropriation risks are very low. In the energy sector, the Abu Dhabi National Oil Company has opened itself to new financing sources, for example, issuing bonds in 2017 and inviting investors to acquire stakes in its refining and pipelines businesses in 2019-21. These moves suggest the economy’s bedrock energy sector will be increasingly outward-looking.
Last year, the U.A.E. began permitting 100% foreign ownership of companies; previous rules restricted foreign ownership to designated free zones.
An initial public offerings rush is also underway with state-run companies such as ADNOC and Dubai Electricity and Water Authority. This is part of a broader regional competition with Riyadh for foreign investment. This policy, spearheaded by national corporate champions, further suggests very low expropriation risks.
There is regulated space for citizens to lobby 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 organising. In parallel, Abu Dhabi, through the federal budget, will increase 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. Despite the U.A.E.’s decision to draw down its military operations in Yemen against the Iran-aligned Houthis, the latter have targeted Dubai and Abu Dhabi with missile and drone attacks since the start of 2022.
These attacks are exposing the U.A.E.’s vulnerability to non-state actors that are proxies of, or aligned with, Iran. Such risks could escalate if world powers and Iran revive the Iran nuclear deal, which could embolden Tehran’s armed forces and provide an oil windfall to finance its proxies and missile programme.
The Abraham Accords’ sensitivity (the deal was signed between Israel, the U.A.E. and the U.S. in 2020) means Abu Dhabi will continue strengthening its intelligence capabilities, emphasising cybersecurity and artificial intelligence-powered surveillance. In the wake of the Houthis’ attacks, Israel offered to step up intelligence cooperation with the U.A.E., with which it shares a common animosity to Iran.
The U.A.E.’s development model is based on openness to global capital, so the risk of capital controls or 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. The dramatic rebound in oil prices in 2022 has strengthened the U.A.E.’s financial position further still.
There is some trade sanctions risk, with Dubai being a transit point for weapons and drugs smuggling by criminals and militants based in South and Central Asia, East Africa and the Middle East. Dubai’s ports have also been used by Iranians to smuggle banned U.S. goods, gold and dual-use items subject to international sanctions. Irregular seizure of vessels by the Iranian coastguard in the Gulf indicates ongoing smuggling operations based out of the U.A.E.
‘Dirty money’ flows are another concern. 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 (AML/CFT).
The U.A.E.’s recently formed Executive Office to Combat Money Laundering and Terrorist Financing has established a register of corporate beneficial ownership, that can supply requested information to international counterparties in just three days. The U.A.E. will be hoping to make enough progress on its frameworks by FATF’s next annual review in 2023. Revoking the designation will be important for the U.A.E.’s reputation as the region’s finance hub.
AA-rated Abu Dhabi enjoys positive credit ratings by the main rating agencies, owing to its strong financial buffers and low government debt at under 15% of gross domestic product (GDP). 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-fuelled development and its much smaller oil and gas reserves mean it is far more indebted than Abu Dhabi. Last year’s oil-price collapse and COVID-19 have raised renewed concerns around Dubai’s debt sustainability; a broad assessment of the country’s public sector debt puts the country’s debt burden at 148% of GDP. However, the implicit guarantee that Abu Dhabi would shore up Dubai’s liquidity ensures sovereign default risks are contained.
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