Rising from the Desert: How UAE Economy Affected by Coronavirus

After a subdued economic performance in recent years, partly due to cuts in oil output as part of OPEC agreement, continued corporate restructuring, reduced government investment and declining real estate prices, economic activity is expected to pick up in the United Arab Emirates in the future.

Security guards guide shoppers at the entrance of a market in Dubai, on April 23. Photographer: Christopher Pike/Bloomberg

Millions of people have experienced a fall in income and the economy suffered a huge economic shock when the United Arab Emirates (UAE) went into lockdown. The country’s economy is being affected by the spread of COVID-19 as well as the sharp decline in oil prices.

The cardinal missing-point lies way back with after the discovery of oil, Dubai started to ‘buy and build’ and soon became the ‘centre-point’ of world biggest buildings and skyscrapers with splendid landscapes that are not even that easy to encapsulate in a camera.

Dubai and the UAE went wrong as it did not build its own industries, it did not synergise its indigenous population towards enterprise, and slowly and steadily, started to become increasingly dependent of borrowed-work-force, which all is in disarray, due to the outbreak of COVID-19 pandemic, sending Dubai into deep trouble.

Now, with events canceled, flights grounded and investment halted, this sheikhdom in the United Arab Emirates is threatened both by the virus and a growing economic crisis. Under pressure even before the outbreak, Dubai and its vast web of state-linked industries face billions of dollars in looming debt repayments.

In October, the UAE leads Arab nations and comes 37th globally in the Covid Economic Recovery Index Ranking, developed by the Horizon Research Group. Business activity in Dubai dropped for a second month in November as the coronavirus pandemic continued to weigh on demand. It also quoted in a study by Oxford Economics a quantitative analysis firm as saying that the UAE, with a population of 9 million, may lose up to 900,000 jobs. The burden of job losses has fallen on the expat population, leading to a departure of many workers and a decline in population.

The non-oil private sector economy in the Middle East’s business hub deteriorated last month to the lowest since May, according to IHS Markit. Its Purchasing Managers’ Index dipped to 49 from 49.9 in October, falling further below the 50 mark that separates growth from contraction. Except for VAT and corporate tax on oil and gas companies, and branches of foreign banks, the UAE does not impose corporate tax on businesses registered onshore. However, several transparency initiatives implemented recently in the country, related to the OECD’s BEPS project, and international exchange of information, could have material impact on business operations (i.e. Economic Substance Rules).

While the UAE, as with other countries, is yet to fully assess the human and economic costs of the new COVID-19 pandemic, the emerging consensus is that public health measures to contain the novel virus will have a significant impact on the global economy. According to IMF, the outlook among UAE businesses for the next 12 months was at a joint-record low on par with the reading in August with fears over the persistence of the pandemic hurting future activity. Cases in the Gulf nation have gained momentum over the past month, rising to the highest on record.

The UAE’s non-hydrocarbon (non-HC) economy was already weakening prior to the pandemic as it faced persistently weak business sentiment and a prolonged real estate downturn, according to World Bank. Overall GDP contracted by 0.3% in Q1-2020, with non-HC GDP contracting by 1.9% y/y. The purchasing managers’ index (PMI) had slipped to 49.1 in February (below 50 indicates negative growth) for the first time since the crisis in 2009. On the other hand, HC GDP increased by 3.3% as OPEC+ cuts ended.

As of 2019, the total contribution of the tourism sector to the GDP of the United Arab Emirates (UAE) equalled 11.5 per cent. More than 2.3 million visitors cited business as their main purpose of travel to Dubai in 2019, marking a two per cent increase compared to 2018. Thus, the UAE MICE industry was among the global leaders before the COVID-19 pandemic occurred.

UAE: 50% Residents Say Savings Have Been Hit by Covid-19 Pandemic- Survey

In the wake of COVID-19, authorities aggressively implemented a containment strategy with strict lockdowns, postponed major events such as World Expo2020, imposed social distancing, and large-scale testing. Dubai, the rare regional economy not based on energy, is no better off. Its hospitality industry has enjoyed a boom in Chinese tourists in recent years, receiving nearly 1 million in 2019. Hotels were already experiencing their lowest average daily rate since 2003, and with business travel being curtailed and conferences canceled, that sector is experiencing a coronavirus crash.

The sectors hardest hit by the virus outbreak include tourism, aviation, petrochemicals, retail and real estate. But there have been a few that have gained in prominence as well – those such as “technology, internet services, digital entertainment, e-commerce and food business”. Experts say that the government is handpicking the high priority sectors where it needs to commit significant investments for the future.

Economic reopening

The UAE has reopened its economy gradually over the past months. Starting April 24, the authorities have begun gradual reopening of shopping centers and other businesses, subject to social distancing requirements, and began facilitating repatriation of expatriate workers wishing to return to their home countries. Several airlines have resumed a limited number of regular passenger flights. Most government employees have returned to work as of mid-June. Dubai reopened to international tourists on July 7.

Starting July 29, restaurants, coffee shops, cafes and other licensed food outlets in Abu Dhabi can now operate at 80 per cent capacity. Schools re-opened in September. On September 23rd, the Abu Dhabi government reopened recreational, entertainment play halls inside and outside malls.

The economy seemingly started to recover in the third quarter, after the second quarter’s sharp contraction. In September, the PMI moved back into expansionary territory and recorded the best reading in 11 months, signaling an improvement in the business conditions of the non-oil private sector.

At the end of September, UAE authorities resumed issuing visas to foreign visitors. In October, UAE has started issuing employment visas for vital government and semi-government sectors, as well as entry permits for domestic workers. UAE also reopened some cultural landmarks to visitors.

UAE’s response

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.

However, the Global Competitiveness Report by the World Economic Forum noted that the UAE is one of the leading countries that are relatively more resilient to the Covid-19 pandemic. UAE is further positioning to better take the advantage of globalisation, including the increasingly globalised capital, labour and technology, the interconnectivity and dependence of globalisation also means the country will shared in the impact of global COVID-19 pandemic.

The past two years may prove to be vital for the UAE’s ability to cope with the pandemic’s devastating economic effects. Meanwhile, the UAE announced structural governmental changes as a response to Covid-19’s damaging effects to it’s economy, “which include abolishing half of government service centres and converting them to digital platforms within two years”. This can yield a quicker and more stable response to the pandemic’s threat to FDI operations, as companies may proceed digitally without interruption.

The authorities have increased testing and scaled up disinfection efforts, established a dedicated task force to ensure uninterrupted supply of consumer goods and prevent manipulative pricing practices, and launched remote learning initiative to ensure continuity of education.

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.

Economists say, 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.

The UAE central bank has launched an AED 100 billion comprehensive Economic Support Scheme for retail and corporate customers affected by COVID-19. Abu Dhabi Executive Council announced an economic stimulus package which includes allocating AED 3 billion to the SME Credit Guarantee Scheme. Dubai Government launched an AED 1.5 billion economic stimulus package which seeks to enhance liquidity and reduce the impact of the current global economic situation.

These initiatives include providing credit guarantees for SMEs, exemptions on commercial vehicle registration fees, subsidies for electricity for startups, fast-tracking government invoices to get businesses paid more quickly, land leasing reductions, penalties waived, rental rebates for hospitality, tourism, and entertainment sectors, and beneficial lending options, among others.

In addition to the government’s measures the private sector has also stepped up to the plate and numerous of the large property leasing companies have offered reduced and even exemptions from rental payments for commercial tenants that have had to shut down their businesses due to COVID-19. Various banks, property developers and even utility suppliers have also offered payment holidays and have deferred evictions and legal collections in the light of the current situation in the UAE relating to COVID-19.

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