UAE policies prop up economy to withstand rising geopolitical headwinds, say analysts

Tourism and other diversification efforts remain key driver for country's growth

The UAE, along with other Gulf nations, is undergoing a significant economic transformation, moving away from a traditional dependence on oil and gas. AFP

The UAE's economy will continue to remain strong in the coming years, thanks to its focus on economic diversification, despite facing numerous challenges such as heightened tensions in the Middle East and declining oil prices, according to analysts.

Oxford Economics forecasts the UAE's gross domestic product to grow by 3.7 per cent this year before rebounding to 5 per cent next year, slightly below the International Monetary Fund's 2025 growth forecast of 5.1 per cent.

However, tensions because of the war in Gaza could weigh on the UAE's non-oil growth through a potential decline in tourism and investment, Scott Livermore, Oxford Economics' chief economist for the Middle East and North Africa said.

“But I think that's kind of pushing the extreme and pushing the crisis quite a bit further than to where we have it now,” Mr Livermore told The National.

“If this kind of measured tit-for-tat continues and doesn't escalate, then I think the impact on growth in 2025 … shouldn't be significant, and shouldn't derail the robust, positive picture” for the UAE.

Mr Livermore however said the real estate market also faces a potential risk of oversupply. Dubai home values have risen for 17 consecutive quarters and are up 20 per cent on an annual basis in the third quarter, according to a report by property consultancy Cushman & Wakefield Core this month.

“And while that risk persists, I think there's probably a number of reasons to be optimistic that we're not in a bubble,” he said, pointing to high demand, Dubai's relative affordability compared to other large cities and supply management.

Mr Livermore also noticed risks around lower oil revenue, although he said it is “not imposing a fiscal constraint”.

Despite these challenges, however, he considers the UAE's economic outlook as “robust and resilient”.

Owing to this positive outlook is the nation's diversification efforts. The UAE, like its partners in the Gulf, is in the middle of transforming its economy from a reliance on oil and gas to sustainable economic growth.

“It boils down to the diversification in the economy that's been achieved, but also the attractiveness that has been evident since Covid and seen as a safe haven, both regionally, but also internationally,” said Emilio Pera, KPMG Lower Gulf chief executive and senior partner.

One crucial economic driver is the UAE's thriving tourism industry.

Dubai welcomed 13.29 million international visitors from January to September this year, compared to 12.40 million at the same time last year, according to data from Dubai's Economy and Tourism.

About 85,000 people visited the Cop28 summit held in Dubai last year, held at the emirate's Expo City which opened in 2021.

“Dubai has become … a very popular destination for global and regional conferences, and that is attracting not only people to attend these but also has had a significant positive impact on tourism,” Mr Pera said.

Dubai's economy grew by 3.3 per cent in the second quarter this year driven by tourism and technology, the Dubai Media Office said this month.

Underscoring tourism's economic importance, Abu Dhabi's tourism body announced in April it would invest more than $10 billion in infrastructure as part of the country's efforts to welcome visitors.

Another major factor in the UAE's diversification strategy is its adoption of artificial intelligence. The UAE, which hopes to become a global hub for AI and semiconductors, has recently made major deals with leading players in the sector.

Abu Dhabi-based AI company G42 announced a partnership with Nvidia in September to help improve global weather forecasting, which followed a separate partnership G42 made with Nvidia's Earth-2. In April, Microsoft announced a $1.5 billion investment in G42 to help build on the UAE's initiatives as well as other countries.

KPMG anticipates the tech sector will contribute to 19.4 per cent of the UAE's GDP within the next decade, owing in part to the country's AI initiatives.

The firm's CEO Outlook survey, published in September, showed generative AI is a top investment priority for 52 per cent of UAE respondents, compared to 64 per cent globally.

“[The UAE is] definitely taking a more measured approach, taking a responsible approach to implementation of AI and generative AI in the market,” Mr Pera said, referring to data management and quality of data.

Chief executives in the UAE are also confident about their company's growth prospects, according to the KPMG survey. The survey found that 56 per cent of chief executives in the UAE anticipate a significant return” on their environmental, social, and governance investing within the next three to five years.

Accounting for this optimism is a business-friendly environment.

The UAE offers incentives aimed at increasing small and medium enterprises established in the country, while the creation of a retirement and golden visa has also enticed people to remain longer.

“It wasn't as attractive for people to see the UAE as a longer-term residential opportunity, and those visa changes have definitely enabled that,” Mr Pera said.