Lower oil prices and a rigorous process of fiscal reform have led to a challenging economic backdrop for Abu Dhabi’s residents and businesses in recent years. Although concerns that the Covid-19 pandemic of 2020 would lead to a global downturn in the year ahead loomed large at time of writing, a shift to a more expansionary fiscal stance has helped establish a more promising foundation for growth moving forwards. Moreover, while government funding remains central to economic expansion, a major overhaul of the investment framework at both the national and emirate level aims to harness the power of private capital in Abu Dhabi’s future development.
The Big Picture
The emirate of Abu Dhabi is part of the UAE, the GCC’s second-largest economy and 30th largest in the world. The UAE possesses the world’s sixth-largest proven oil reserves, but has worked hard to diversify its economy away from a reliance on hydrocarbons: at the federal level, the non-oil sector accounts for around 75% of nominal GDP. Abu Dhabi is a major contributor to the UAE’s GDP, accounting for some 60%. Furthermore, as of November 2019 the emirate had the highest sovereign ratings in the MENA region, scoring “Aa2”, “AA” and “AA” from global credit ratings agencies Moody’s, Standard & Poor’s (S&P), and Fitch, respectively. Its citizens enjoy the second-highest GDP per capita globally, at $87,586, according to the IMF. The global oil price decline, however – which saw the average price fall from more than $100 per barrel to about $55 in 2014, recover to about $70 in 2018, before dropping to $20 in April 2020 and recovering slightly to $40 in June 2020 amid the Covid-19 pandemic – has affected the local economy. Despite its diversification efforts, Abu Dhabi derives about 50% of its real GDP and more than 90% of central government revenue from the hydrocarbons sector, according to S&P. The non-oil economy, meanwhile, has faced the challenges of weak job growth, a cooling property market and a slowing hospitality sector. The private sector is also coming to terms with lower direct government spending: Abu Dhabi investment project awards in 2019 were estimated at around $23bn, compared to the $45bn recorded in 2012. These factors resulted in GDP growth at constant prices of 1.25% in 2018 and 1.45% in 2019. The government of Abu Dhabi’s response to this challenging economic scenario is Ghadan 21, or Tomorrow 21: a short-term development strategy that aims to establish the emirate as a more attractive location for business and private sector investment.
Ghadan 21 is a Dh50bn ($13.6bn) economic accelerator programme that was launched in 2018 and will be implemented until 2021. The strategy features a diverse array of initiatives focused around four main pillars: business and investment; society; knowledge and innovation; and lifestyle.
Under the new strategy, Abu Dhabi aims to increase the private sector’s contribution to the economy by five percentage points, from 32% of GDP in 2019 to 37% by 2021. The target for the share of non-oil foreign direct investment (FDI), meanwhile, has been set at 7% – a significant advance from the current level of 1%. The attainment of both these goals is to be partly achieved by encouraging smaller businesses to establish and expand: the Ghadan 21 plan foresees the share of the small and medium-sized enterprise (SME) sector growing from 16% of the economy to 23% (see analysis). The first phase of the plan envisaged Dh20bn ($5.4bn) of spending in 2019. Among its key innovations are a new business licensing framework, a new body charged with attracting foreign and domestic investment, a substrategy focused on boosting research and development activity in the emirate, and an incubator facility that benefits from the involvement of partners such as SoftBank, Microsoft and the emirate’s offshore economic zone, the Abu Dhabi Global Market (ADGM) (see analysis).
Turning around Abu Dhabi’s economy, however, is likely to be a medium-term, rather than shortterm, undertaking. “Abu Dhabi has been one of the most proactive economies within the Gulf region with regard to fiscal consolidation; however, since mid-2018 the focus has shifted towards policies to support economic activity. There have been some indications of a gradual pick-up in spending, alongside progress with key projects,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, told OBG.
The economic headwinds generated by Covid-19 have triggered some short-term measures in the emirate, with a 16-point stimulus package announced by the Abu Dhabi Executive Council in March 2020. The initiatives include electricity and water subsidies for citizens and businesses, an allocation of Dh3bn ($816.6m) to the credit guarantee scheme for SMEs, and a suspension of tourism and municipality fees.
The emirate’s longer-term development objectives are being pursued in accordance with the Abu Dhabi Economic Vision 2030. This economic blueprint forms the conceptual framework around which the Abu Dhabi Department of Economic Development (ADDED) produces its five-year plans in cooperation with the General Secretariat of the Executive Council. The Abu Dhabi Economic Vision 2030 strategy identifies a number of industries where Abu Dhabi might realistically seek to exploit its competitive advantages in a bid to diversify its economy away from a reliance on hydrocarbons revenue. These include tourism, manufacturing, logistics, health care, education, financial services, aerospace and telecommunications. The strategy also established a number of macroeconomic and macro-fiscal objectives, such as building an open and globally integrated business environment; adopting a disciplined fiscal policy that is responsive to economic cycles; establishing a resilient monetary and financial market environment with manageable levels of inflation; improving the efficiency of the labour market; developing infrastructure capable of supporting economic growth; and enabling financial markets to become the key financiers of economic sectors and projects.
A number of other long-term plans support the key objectives of the strategy. The Abu Dhabi Transportation Mobility Management Strategy is also scheduled for full implementation by 2030 and aims to shift movement patterns to more sustainable modes of transport. This effort involves improving access to public transport by enhancing existing infrastructure and creating an efficient, multi-modal transport network. The Surface Transport Master Plan defines how the new network is to be developed, and focuses on innovative, low-emission public transport options as well as facilitating walking and cycling. Abu Dhabi Environment Vision 2030, meanwhile, is an Abu Dhabi-specific framework designed to preserve the emirate’s natural heritage by addressing five areas: climate change; waste management; water resources; biodiversity, habitats and cultural heritage; and clean air and noise pollution.
The emirate’s longerterm development strategy calls for more privately funded growth. To that end, the UAE recently introduced the Foreign Direct Investment Law, which opens the door to 100% foreign ownership of companies in approved sectors, representing a historic shift in national policy (see Trade & Investment chapter). Also at the federal level, a raft of UAE visas aims to attract fresh capital flows. These include a 10-year residency visa for specialists in certain fields, such as scientific research, and visa extensions for dependants and graduating students. The UAE has also introduced dual licences for companies operating in free zones, thereby allowing for onshore operations and participation in public procurement tenders.
Similarly, the government of Abu Dhabi has introduced a number of emirate-specific measures aimed at improving its business environment. Fees levied for delayed business licence renewals have been removed, and a new framework for instant licensing in most commercial activities was introduced. All new businesses in Abu Dhabi seeking a licence have also been exempt from needing a registered office or work space for two years.
Together, the reforms at the national and emirate level are helping to maintain the UAE’s position in the World Bank’s ease of doing business index. In the “Doing Business 2020” report, the country remained the strongest performer in the region, and placed 16th overall out of 190 economies, scoring particularly well in categories such as access to electricity, dealing with construction permits, contract enforcement and starting a business. The country’s lowest-scoring categories included trading across borders and resolving insolvency.
At the national level, the UAE has made significant progress towards its goal of diversifying the economy away from hydrocarbons activity, a process that has been guided by the UAE Vision 2021 strategy. At the emirate level, GDP data shows that considerable advances towards diversification have been made in recent times: the oil and gas sector’s contribution to the economy shrunk to 50.2% of GDP at constant prices in 2019, from 59.3% in 2005, according to Statistics Centre - Abu Dhabi (SCAD). Nevertheless, as Abu Dhabi controls the bulk of the UAE’s oil reserves of 97.8bn barrels, according to BP’s “Statistical Review of World Energy 2019”, hydrocarbons will remain a key pillar of the emirate’s economy for years to come, with the wealth generated by these activities driving the growth of a range of other economic sectors (see Energy chapter).
The largest non-oil sector in Abu Dhabi is construction, which in 2019 made up 9.9% of GDP (see Construction & Real Estate chapter). At the national level, the UAE’s construction sector was expected to expand by 6-10% in 2020, according to a survey of industry executives carried out by global consultancy KPMG. Due to Abu Dhabi’s ambitious development strategy, much of this growth was expected to occur within the emirate. It is worth noting, however, that this projection is likely to have been revised downwards due to the adverse effects of Covid-19.
The finance and insurance sector is the second-most important non-oil contributor to GDP, accounting for 6.7% of the total in 2019. According to SCAD, banks dominate financial intermediation in Abu Dhabi, although there is a large number of non-bank financial institutions, such as holding companies, trusts and financial leasing institutions. Three of the UAE’s “big five” banks are located in Abu Dhabi, the largest of which is First Abu Dhabi Bank, a regional giant that was created by the 2017 merger of two local institutions: National Bank of Abu Dhabi and First Gulf Bank. Three of the UAE’s top-five insurers by total assets are also based in Abu Dhabi: Abu Dhabi National Insurance Company, Al Ain Ahlia and the Emirates Insurance Company.
Looking to the capital markets, the Abu Dhabi Securities Exchange’s total market capitalisation of Dh387.9bn ($105.6bn) as of March 2020 made it the largest exchange in the UAE. Abu Dhabi’s status as a financial centre has been significantly enhanced by the late-2015 opening of ADGM. As an international financial centre, ADGM is a central component of the emirate’s growth strategy, and is home to more than 2600 registered financial and non-financial businesses, of which there are more than 120 regional and global financial service firms. ADGM has established wealth and asset management as its core functions, with its related activities including an innovative approach to financial technology development (see Trade & Investment chapter). Furthermore, ADGM has been changing the investment agenda and narrative in the region towards sustainable financing (see Capital Markets chapter).
Abu Dhabi’s access to low-cost feedstock makes manufacturing a promising route to economic diversification. Boosting manufacturing capacity is a core component of the Abu Dhabi Economic Vision 2030, and over the past 15 years the emirate has invested more than Dh51bn ($13.9bn) in its industrial infrastructure. According to SCAD, manufacturing is the emirate’s third-largest non-oil sector, accounting for 6% of GDP in 2019 (see Industry chapter). Abu Dhabi’s development strategy has identified a number of priority industries that will help the government to achieve its economic diversification goals, including aerospace, steel, food processing, petrochemicals, defence, and aluminium and its derivative products. Much of this development will take place in the emirate’s specialised industrial zones, which target larger-scale and international investment, such as the four zones operated by ZonesCorp and the Khalifa Industrial Zone Abu Dhabi (KIZAD) being developed by Abu Dhabi Ports. Both ZonesCorp and Abu Dhabi Ports are part of the 25 companies across 11 sectors under the umbrella of the Abu Dhabi Developmental Holding Company, which rebranded in March 2020 from ADDHC to ADQ.
Other areas of the economy that are playing an important part in Abu Dhabi’s diversification plans include the real estate sector, which accounted for approximately 3.6% of GDP in 2019, and has been significantly buoyed by the emirate’s status as a safe haven and the demand arising from Dubai’s Expo 2020, now scheduled to begin in October 2021. The wholesale and retail sector represented 3.9% of GDP that year and has been driven by the UAE’s high-income status, as defined by the World Bank. The information and communication segment, which comprised some 3% of the emirate’s GDP, is being driven by investment in areas such as social media, TV and broadcasting, and digital and creative media content. The transport and storage industry, which accounted for nearly 2% of GDP, is growing thanks to big-ticket projects such as the Midfield Terminal Building at Abu Dhabi International Airport and the development of the 1500-km Etihad Rail network.
The oil price decline that began in mid-2014 – and the more recent drop in early 2020 – has served to reinforce the need for diversification in the Gulf region’s hydrocarbons-oriented economies. Lower oil and gas revenue has seen the budget surpluses of GCC producers turn to deficits and their fiscal scenarios come under enhanced scrutiny. Assessing Abu Dhabi’s fiscal scenario is complicated by the fact that, as a member of a federation, its public finances are governed by both a federal budget and an emirate-level budget. The federal budget set by the UAE Ministry of Finance generally only accounts for around 15% of total fiscal spending in the UAE. While it is an important indicator of the health of the national economy, there is not always a strong correlation between federal and emirate budget allocations, meaning that it is possible that an expansionary federal policy can co-exist with a consolidation of the Abu Dhabi budget, or vice versa.
At the national level, the government responded to the slower growth caused by softer oil prices post-2014 by pursuing a policy of fiscal easing that resulted in a string of fiscal deficits, which reached 2.5% of GDP in 2016. By 2018 recovering oil prices helped achieve a return to surplus equivalent to 2.2% of GDP. The federal budget for 2019 accelerated the expansionary trend: its projected spending of Dh60.3bn ($16.4bn) was the biggest in the nation’s history and represented a rise of 17.3% on the previous year. The estimated budget surplus for 2019 equalled 2.4% of GDP. Spending could increase further in 2020, as many countries are putting forward fiscal as well as monetary responses to Covid-19.
Return to Surplus
At the emirate level, Abu Dhabi’s oil revenue has historically allowed it to run consistent budget surpluses, despite a high level of expenditure in areas such as fuel subsidies and health care. While the federal government deployed expansionary budgets in the wake of the 2014 oil price decline, Abu Dhabi adopted a policy of fiscal consolidation that saw a wide range of spending cuts.
After posting fiscal deficits in 2015 and 2016, the emirate budget returned to a surplus in 2017. Firming oil prices have also boosted the emirate’s spending power, as has the extra revenue from the implementation of a value-added tax (VAT). The UAE was one of the first countries in the GCC to introduce the new tax, implementing it fully on January 1, 2018. The authorities agreed that 70% of collected revenue is to be distributed among the individual emirates, while the federal government retains 30%. Annual revenue from VAT is expected to represent 2% of GDP over the coming years, according to the IMF.
The return to budget surplus enabled by an improving revenue scenario and government spending rationalisation has allowed the emirate to revert to an expansive fiscal stance in order to spur economic activity: the Dh50bn ($13.6bn) that is to be spent under the Ghadan 21 programme represents 3.3% of the UAE’s GDP in 2018. Accurately forecasting Abu Dhabi’s surpluses is complicated by the frequency of budget reviews, with spending plans regularly altered mid-year, and the large component of volatile hydrocarbons revenue on the emirate’s balance sheet. This does not, however, prevent the emirate from receiving high sovereign ratings from the leading ratings agencies: Abu Dhabi’s public finances are more robust than is shown in its official accounts, as the portion of its oil revenue that has been directed into reserve accounts for decades is not reported as current revenue, while the public accounts do not include the significant income derived from the emirate’s portfolio of publicly owned foreign assets.
Much of this asset base is controlled by the emirate’s sovereign wealth funds (SWFs). Abu Dhabi has traditionally diverted 70% of its budget surpluses to the Abu Dhabi Investment Authority (ADIA), which is ranked as the third-largest SWF in the world by the Sovereign Wealth Fund Institute (SWFI), with total assets of around $697bn in 2020. Founded in 1976 ADIA has played a salient role in the development of the emirate. Its current investment portfolio is diversified across more than 24 asset classes and subcategories, the principal areas of investment being equities, fixed income, alternative investment, real estate, private equity and infrastructure. While the fund has traditionally focused on developed markets in the West, recent years have seen ADIA show an increased interest in Asian markets, particularly China and India. As well as playing a vital economic role for the emirate, ADIA performs a valuable human resource function. The fund’s nurturing of local talent has seen past employees move on to hold key roles in Abu Dhabi and elsewhere in the nation, including as ministers and chairmen of government departments.
A number of other government-owned investment arms play similarly important roles in strengthening Abu Dhabi’s external buffers and developing the local economy. The Abu Dhabi Investment Council (ADIC) was spun off from ADIA in 2007 to take over the SWF’s domestic interests, which include institutions such as Abu Dhabi Commercial Bank and First Abu Dhabi Bank. In 2018 ADIC became part of Mubadala Investment Company, the Abu Dhabi-based investment and development company also owned by the government of Abu Dhabi. In a statement issued at the time of the merger, Sheikh Mohamed bin Zayed Al Nahyan, the crown prince of Abu Dhabi and deputy supreme commander of the UAE armed forces, said, “ADIC becoming part of the Mubadala group is yet another step in Abu Dhabi’s efforts to accelerate the diversification of the UAE’s economy. With an investment vehicle of significant scale, [an expanding local talent pool] and wide geographical reach, we enhance the country’s competitive position.”
Mubadala Development Company was established in 2002 and became Mubadala Investment Company in 2017, and differs from traditional SWFs in that it is partly self-financing through a debt issuance programme and is therefore classified by the SWFI as a strategic development SWF. As of March 2020 it had assets under management totalling $229bn, distributed across businesses and investments in more than 50 countries, which it manages through five global offices. The company also invests within Abu Dhabi, in entities such as ADGM. Sectors Mubadala invests in include aerospace, renewables and health.
The response of most GCC states to lower oil prices has been to borrow from global debt markets to deploy fiscal stimulus. Abu Dhabi has taken a more cautious approach than some of its neighbours. Its 2016 sovereign bond – a $5bn offering through a pair of $2.5bn tranches – was its first in seven years. The sale was considerably larger than the $1.5bn offering in 2009 and was made viable by the emirate’s strong credit ratings, with both S&P and Fitch granting the emirate an “AA” rating for its long-term debt. The Abu Dhabi government followed its 2016 success with a $10bn bond in 2017, and its most recent $10bn offering in September 2019 was well received: the order book peaked at over $25bn, with orders coming from more than 650 unique accounts, according to the Department of Finance. The issuance also brought the government capital at good value, with the transaction achieving the tightest-ever spreads by a MENA sovereign across the tenors, as well as the lowest coupon on 10- and 30-year eurobonds by a MENA issuer since Abu Dhabi’s first issuance in 2007.
Public Debt Law
A recent legislative change has given rise to the prospect of a new phase of debt issuance at the national level. The UAE issued a new Public Debt Law in October 2018, which allowed the federal government to issue sovereign debt for the first time. The law also established a federal-level Public Debt Management Office (PDMO) within the Ministry of Finance, which will cooperate with the Central Bank of the UAE (CBUAE) to establish national debt-management policies and strategies. The PDMO will also monitor risks associated with the issuing and trading of public debt instruments. At the emirate level, meanwhile, the new body will work with local governments to develop efficient primary and secondary debt markets. According to government statements to local media, the UAE was preparing for a credit evaluation of the country at the end of 2019 and planning to make its first federal issuance in 2020. Although no debt had yet been issued as of March 2020, the passing of the federal debt law paves the way for the CBUAE to become the main issuing agent of government debt, a function that will greatly strengthen its ability to manage liquidity.
During periods of low oil prices, Abu Dhabi has other book-balancing tools at its disposal beyond the issuance of public debt. Its cost-cutting measures in the wake of the oil price decline that started in mid-2014 included the removal of transport fuel subsides, and an overhaul of the electricity and water tariff regime.
Its attempts to raise revenue, meanwhile, went beyond the imposition of VAT. In 2016 the emirate introduced a number of new fees related to the tourism sector and the value of rental contracts. A 4% municipality fee, alongside a charge of Dh15 ($4.08) per night on hotel bills, is collected by the Department of Tourism and Culture – Abu Dhabi and deposited into the government’s budget. On the rental side, a 3% municipal fee at a minimum charge of Dh450 ($122) per year is levied on the annual value of expatriates’ rental contracts.
The emirate’s most powerful budget-balancing tool, however, is its ability to repatriate the assets of its investment arm, ADIA. Its total assets are estimated to equal 400% of Abu Dhabi’s 2016 GDP – enough to support the budget for 23 years at current spending levels. A lack of publicly available data, however, makes ADIA’s role difficult to measure.
Alterations to the tax code and revisions to government spending programmes have not resulted in a significant rise in the inflation rate at either the national or the emirate level. The average annual inflation rate in the UAE has declined from a high of 4.1% in 2015 to 1.6% in 2016 and a projected -1.9% in 2019, according to the IMF, largely as a result of weak demand and falling housing costs. The IMF projects the inflation rate will reach 1.5% in 2021.
At the emirate level, Abu Dhabi has recently witnessed a deflationary trend for the first time since statistics were made publicly available in 2005: according to SCAD, consumer prices in the emirate declined by 0.8% in 2019, largely as a result of falling costs in the housing, utilities and fuel groups. Prices also declined in the transport, clothing and footwear, and food and beverage groups. Areas where prices remained on an inflationary trend included recreation and culture, tobacco, furnishings and household equipment, and restaurants and hotels.
The CBUAE’s ability to manage inflation is circumscribed by the currency peg to the US dollar, which means that its policy rates generally shadow those of the US Federal Reserve. In March 2020 the CBUAE lowered its repo rate on short-term liquidity, as well as its interest rate on certificates of deposit, by 50 basis points following a similar cut in the US.
While long-term growth forecasts for Abu Dhabi are generally favourable, the full extent of the economic shocks anticipated as a result of the global Covid-19 pandemic in early 2020 were still unfolding by the middle of the year.
Before the outbreak S&P had forecast that Abu Dhabi’s economic growth would average 2.5% between 2019 and 2022, on the back of recovering oil production and a revival in investment. Moody’s, meanwhile, attributed an anticipated 3% expansion of the UAE economy to the nation’s economic diversification efforts and higher public spending in Abu Dhabi. While traditional areas of activity, such as construction, are expected to benefit from the emirate’s development strategy, other industries like communications are anticipated to emerge as growth drivers in the short term.
Looking to the longer term, the key test of the emirate’s development strategy will be its ability to replace public spending with private sector investment. The IMF estimates that the UAE’s non-oil primary deficit is 7% of non-oil GDP – below the benchmark needed to ensure sufficient saving for future generations. A gradual return to fiscal consolidation at both the federal and emirate level is therefore desirable in the medium term, but achieving this without endangering economic growth will be a challenge for government planners going forwards.
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