Some risk remains that the relatively low fiscal commitment could eventually lead to problems with Dubai’s large business conglomerates, which suffered under the COVID-19 pandemic.
The United Arab Emirates posted a consolidated budget deficit of only AED3 billion in 2020, an unexpectedly small figure considering the economy declined by 6.1% and oil revenues sagged by 22% last year. The deficit equaled just 0.2% of GDP. The fiscal data, which is still preliminary, presented by the Federal Competitiveness and Statistics Centre (FCSC), represents the fiscal results from all seven Emirates and the federal level on a consolidated basis.
Revenues and expenditures both declined. Total fiscal revenues were down by 23% compared with 2019, while expenditures decreased by 16%. Oil revenues accounted for 41% of overall public revenues, almost unchanged from the previous year.
Fiscal support measures have been comparatively small against the economic decline in 2020 and the services part of the economy that suffered from low tourist numbers and falling demand levels in general. According to the International Monetary Fund (IMF), fiscal support measures to date equaled AED32 billion, or 2.8% of GDP, with about half of this being doled out by federal authorities to the private sector.
Measures included a reduction of government fees and other charges, refunding of bank and financial guarantees, support for small-and medium-sized enterprises, and accelerated development of infrastructure projects. Abu Dhabi announced support equal to AED9 billion as part of its ongoing Ghadan 21 programme, which had been in place already prior to the pandemic.
The major risk for the UAE has been the banks and financial institutions in Dubai, which are highly leveraged and which have been suffering from the decline of the services business and the lack of demand in the real estate sector in particular. The real estate sector decline had started already, but the COVID-19 pandemic accelerated this trend temporarily. Dubai’s real estate sector has yet to turn the corner, although real estate prices in Abu Dhabi started to increase again in the first quarter 2021, offering a ray of hope.
There has not yet been a major incident with one of the large conglomerates that dominate the Dubai side of the UAE. Back in the financial crisis of 2008, it was Dubai World that collapsed and had to be rescued, but the authorities have so far managed to avoid such a large-scale calamity happening again.
This is largely due to the success of the Targeted Economic Support Scheme (TESS) from the UAE’s central bank, which was first announced in March 2020 and was repeatedly extended. The latest extension took place in April 2021, when the programme was extended until the end of 2021. The programme includes zero-cost loans that are extended to existing borrowers, with a grace period of payments being extended to December 2021 and banks having the ability to grant loans under this facility until June 2022.
Outlook
The surprisingly small fiscal deficit affirms the UAE’s conservative approach to spending. The economy so far seems not to have suffered too much from this approach, as none of the large business conglomerates went into serious trouble, at least publicly, and the UAE economy as a whole is on a slow but steady recovery track.
COVID-19 cases were rising in the first half of June, but steadied around 2,000 cases per day in the second half of the month. The vaccination campaign has been impressive, and around one and a half doses per resident have been administered to the UAE population as of the end of June.
It remains to be seen if the UAE will continue to manage the crisis comparably well, especially once the TESS regime runs out at the end of the year. Abu Dhabi has deep pockets and should be able to fund a rescue package similar to the one in the aftermath of the global financial crisis. Although an explicit guarantee does not exist, we think that Abu Dhabi’s oil wealth is supporting the UAE’s overall fiscal position and the sovereign risk rating as well.