Diversity fueling UAE growth in face of fluctuating oil
In 2015, oil prices have been sliding down and the question on everybody’s mind is, what will happen to the Middle East?
The GCC’s economy has been built on oil with 30 per cent of the world’s proven oil reserves in these countries, producing 28.6 million barrels per day in 2014.
Coface released a report titled ‘Gulf Countries: Various Reactions to the Same Shock’ that highlights the importance of economic diversification in the Arab nations and how falling oil prices are expected to impact each of the economies.
While countries with fewer financial buffers have been struggling to maintain their growth rate, UAE’s economy has been less impacted by the falling price of oil.
The UAE has 5.8 per cent of the world’s oil reserves with hydrocarbon revenues accounting for 25 per cent of the country’s GDP and 20 per cent of total export revenues.
Therefore, while oil still dominates the UAE market, the country’s sustained growth can be attributed to private consumption and the government’s investment in industries such as tourism, retail and food and beverage.
Government efforts to diversify the economy and lessen the blow of declining oil prices are evident through Vision 2021, the UAE’s long-term economic plan.
This agenda introduces measures to promote trade, and attract more foreign direct investment to accelerate growth.
For example, Dubai’s real estate market has already benefited greatly through foreign investment and also from Abu Dhabi.
However, as oil prices drop due to the decrease in Abu Dhabi revenues and growth of the US dollar, the real estate market may weaken.
To counteract this, Dubai Expo 2020 is only one of the strategies to attract investments and tourists.
One can already see UAE’s status as a leading tourist destination.
In the first quarter of 2015, passenger traffic at Dubai Airport jumped by seven percent to 19.6 million.
As a result, due to the increased influx of tourists, Dubai’s retail sales has also increased by seven percent in 2014 and are estimated to rise further as 2020 approaches.
Food and beverage is another industry that the UAE’s government has developed to provide economic resilience.
This sector plays a vital role in the country’s economic growth with a forecasted growth of 36 per cent between 2014 and 2016. The UAE has been investing $1.4 billion since 1994 in the food processing industry, with special focus in dairy.
Halal food has also been on the rise as people worldwide have begun to prioritize natural food options.
Through these figures, one can discern how the food and beverage industry is demonstrating how to protect the economy, promote growth and avoid fiscal debt.
Overall, United Arab Emirates is a positive example of how economic diversification in the service industry allows the market to be less dependent on oil revenues. As the new nation continues to develop, tourism and food and beverage will eventually account for a larger percentage of GDP and allow for steady economic growth in upcoming years.
The writer is Mena Region Economist, Coface
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