Previous Quarterly Editions
Expropriation Risk: 38 38 38 38 Political Violence Risk: 35 35 35 35 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 45 45 45 45 Sovereign Default Risk: 15 15 15 15
TREND ►
The United Arab Emirates’ (UAE) 2020 decision to begin normalising ties with Israel was an important realignment in regional geopolitics. This followed the August 2020 signing of the US-Israel-UAE ‘Abraham Accords’, which included security, intelligence-sharing and economic provisions between the UAE and Israel. The agreement also signalled that interest in Palestinian statehood has been overtaken by concern to contain Iran’s regional influence. Similar such deals are possible between Israel and Bahrain, Sudan and Morocco (three other Arab states) in future.
The UAE is showing increasing preparedness to adopt a more nuanced regional position, as indicated in mid-2019 when it started winding down its military involvement in the Yemen conflict, given international humanitarian concern. Part of the UAE’s shift is also because it is uncertain how far US security cooperation and guarantees will stretch, even with US President Joe Biden now in office and committed to more traditional multilateralism compared with his predecessor. The UAE has also scaled back its diplomatic and military support for the self-styled Libya National Army.
Regarding Iran, the UAE will continue to de-escalate tensions, partly to reduce the risk of Iranian attacks on UAE economic and security interests. Biden wants to return his country to the 2015 Iran nuclear deal, and potentially to negotiate a new deal. In this respect, the UAE, Israel and Saudi Arabia will oppose any renegotiated deal that does not impose meaningful limits on Iran’s capacity to develop advanced missile technology and support regional militant groups militarily and financially.
More broadly, the UAE’s anti-Islamism and rejection of the Arab Spring’s legacy will remain foreign policy tenets. The UAE will also focus on upgrading its military capacity, including Artificial Intelligence (AI) and autonomous systems and renewed air power, buying US-built aircraft and drones.
Domestically, Crown Prince Mohammed bin Zayed has solidified his decision-making power over key briefs, including defence, security, foreign affairs and economic policy (the latter including energy and foreign investments). In recent months, he has become vice chair of the Supreme Council for Financial and Economic Affairs and chair of the board for the Abu Dhabi National Oil Company (ADNOC). This leaves him with firm control of UAE policymaking.
Competition between Abu Dhabi and Dubai will be limited to the commercial sphere, as both seek to be magnets of business and talent; given Dubai’s indebtedness to Abu Dhabi, its leadership will continue to defer to the capital on most political matters, domestic and foreign.
Expropriation risks are very low. In the energy sector, the ADNOC has opened itself to new financing sources, for example issuing bonds for the first time since 2017 and inviting investors to acquire stakes in its refining and pipelines businesses in 2019-20. These moves suggest the economy’s bedrock energy sector will be increasingly outward-looking. Meanwhile, Dubai will continue to be open to business and investment (with incentives for this) particularly given the economic importance of financial services and real estate.
There is regulated space for citizens to lobby the government. The UAE government classifies all forms of anti-state dissent as terrorism and is likely to increase surveillance of residents following the accords with Israel. The government will watch for any Islamist organising (for which it has zero tolerance). 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 UAE’s intelligence-sharing with regional allies and its well-paid security forces and stringent vetting, alongside its strong civil surveillance, mitigate the risk of successful terrorist attacks. In terms of cross-border threats, the country’s decision to draw down its military operations in Yemen against the Iran-aligned Houthis should reduce risks stemming from there.
The Abraham Accords’ sensitivity means Abu Dhabi will continue strengthening its intelligence capabilities, emphasising cybersecurity and AI-powered surveillance.
The UAE’s development model is based on openness to global capital, so the risk of capital controls or to repatriation of profits is very low. The government’s robust reserves support this orientation: between sovereign wealth fund assets and the UAE’s central bank, the country has about USD1.6tn, providing confidence in its ability to maintain its currency’s peg to the US dollar.
There are some trade sanction risks: 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. Dubai’s ports have also been used by Iranians to smuggle banned US goods, gold and dual-use items subject to international sanctions before the 2015 Iran nuclear deal was originally agreed. Irregular seizure of vessels by the Iranian coastguard in the Gulf indicates that there are ongoing smuggling operations based out of the UAE.
‘Dirty money’ flows are another concern. In April 2020, the Financial Action Task Force warned that the UAE must increase measures to stop money laundering, or risk inclusion on the international watch list. In March, the UAE cabinet approved establishment of the Executive Office of the Anti-Money Laundering and Countering the Financing of Terrorism, to oversee the country’s national action plan in this area.
AA-rated Abu Dhabi enjoys positive credit ratings by the main rating agencies, owing to its strong financial buffers and low government debt, being under 15% of 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.
In November 2020, the UAE received its first federal bond rating from Fitch at AA- with a stable outlook, or one notch below Abu Dhabi. The rating was attained ahead of a potential federal bond sale, intended more to develop a yield curve for government-related entities and the private sector to borrow easily in domestic markets.
Dubai’s model of credit-fuelled development and its much smaller oil and gas reserves means that it is far more indebted than Abu Dhabi. The oil price decline 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 that sovereign default risks are contained.
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