The UAE's economic recovery is gaining momentum and set to accelerate, driven by the country's “early and strong response” to the pandemic and rapid mass inoculation programme, according to the International Monetary Fund.
"We expect non-oil GDP growth to exceed 3 per cent this year and to improve further in the medium-term, while oil GDP will continue to grow with increased production," the Washington-based lender said at the conclusion of its Article IV Consultation with UAE officials.
The fund forecasts the UAE’s economy to grow 3.1 per cent in 2021. That is higher than the Central Bank of the UAE's estimate, which projects the Arab world’s second-largest economy expanding 2.1 per cent this year and 4.2 per cent in 2022, according to its second-quarter review.
Dampened global demand, lower oil prices and reduced oil production under the Opec+ agreement weighed on the fiscal and external balances last year, but “higher oil prices will lift the fiscal and external balances”, said Ali Al-Eyd, who led the IMF discussions.
On Thursday, Moody's Investors Service assigned a (P)Aa2 foreign currency senior unsecured rating to the UAE government’s global medium-term note programme. The rating is supported by the country's very high per capita income, large hydrocarbon reserves and its domestic political stability, it said in a note.
Aa2 is the third-highest long-term credit rating that Moody's assigns to fixed-income securities like government bonds, denoting their very low credit risk. Moody's said it "expects Abu Dhabi's balance sheet to remain among the strongest in the Gulf Cooperation Council (GCC) and the UAE's nominal GDP to recover to pre-pandemic levels over the next two to three years".
Despite uncertainty about the shape of the global economic recovery, "the UAE’s strong reform momentum provides an upside risk to growth", the IMF's Mr Al-Eyd said.
A rebound in tourism and economic activity generated by the delayed Expo 2020, has also helped support the country's recovery from the pandemic-driven slowdown, according to the IMF.
“The UAE moved quickly to address the health and economic effects of the Covid-19 pandemic and the economic recovery has begun to strengthen,” Mr Al-Eyd said.
Though the economy contracted 6.1 per cent in 2020 as a result of the global economic slowdown and sustained a "temporary" recession, growth has bounced back strongly, boosted by pandemic-mitigation measures, the IMF said. The country is among the most vaccinated nations in the world with more than 20 million doses administered, enough to cover more than 93 per cent of the population, Bloomberg’s global vaccine tracker data shows.
Widespread testing and tracing, stringent safety measures and the high vaccination rate have reduced daily infection from a near-4,000 high in January to 270 on Wednesday, government data showed.
The monetary and fiscal support from the government has also helped in accelerating the growth momentum. The Emirates introduced economic stimulus worth Dh388 billion ($105.72bn) since the onset of the pandemic. These packages include the central bank's Dh50bn Targeted Economic Support Scheme (Tess) to boost liquidity in the financial and banking sector, parts of which were extended to June 2022.
“Looking ahead, a gradual recovery is expected in 2021, supported by the UAE’s early and strong health response, continued supportive macroeconomic policies, and rebound in tourism and domestic activity related to the delayed Expo 2020, set to begin in October,” Mr Al-Eyd said.
The current macroeconomic policy mix of the UAE remains "appropriate", the Washington-based lender said. However, support measures should be targeted at viable sectors, companies and supporting people most in need. "For the recovery to be sustained, protecting public health through continued strong vaccination and testing efforts for all nationals and residents remains the top priority."
New fiscal stimulus and structural reforms, including attracting highly-skilled professionals, supporting private sector employment, increasing trade and foreign investment should be prioritised, the IMF said.
The IMF said that liquidity and capital in the UAE’s banking system remain strong as “swift and substantial policy response and the clear and proactive communication by the Central Bank of the UAE have been critical throughout the crisis".
“Ensuring financial stability through continued monitoring of risks will further enhance resilience of the financial system,” the IMF said. “Ongoing efforts to strengthen macroprudential and regulatory frameworks will further support these efforts.”
In the medium term, the UAE should focus on a smooth adjustment to an “environmentally sustainable global economy” and continue reforms.
“This requires a gradual, but marked, fiscal consolidation in the context of a credible medium-term fiscal framework,” the fund said.
The IMF said the country’s ambitious 50-year reform agenda holds “considerable promise” to deliver higher levels of future diversified and inclusive economic growth.
“This comes at an important moment for the UAE as it celebrates its Golden Jubilee and looks to leverage its talent, knowledge base and vision for sustainable and smarter future growth,” Mr Al-Eyd said.
Achieving this outcome requires “prioritisation and sequencing” of reforms and integration of strategies and policies at different levels of government, he said.