The UAE is poised for a "modest" rebound this year as it benefits from a rapid rollout of vaccines and ongoing monetary stimulus, and in the longer term from progress made through digital transformation, the Institute of International Finance said.
The country has "limited the health impact" of Covid-19, helped by its relatively young population and a range of containment measures, a new report from the institute's chief Mena economist Garbis Iradian said.
"We expect modest economic recovery in 2021 ... supported by the partial recovery in domestic demand and an increase in net exports," the report said.
"Monetary policies will remain accommodative until the recovery is well established. The banking system has remained relatively resilient, helped by sound initial capital and liquidity positions and [a] flexible response by the central bank, including regulatory forebearance."
The Central Bank of the UAE reacted quickly to limit the economic fallout from Covid-19, introducing the Targeted Economic Support Scheme offering Dh50 billion of zero-cost collateral funding to banks in March last year, as well as loosening lenders' capital and liquidity buffers to ensure money keeps flowing through the economy. The Tess scheme has been extended to June 30 year. It is part of local and federal support packages totalling Dh388bn so far, Minister of Economy Abdulla bin Touq said in December.
The Arab world's second-biggest economy is projected to grow 2.5 per cent this year, rising to 3.6 per cent next year, according to the UAE Central Bank.
The country can afford to run an expansionary budget given its large financial buffers, with a current account that is still in surplus and public foreign assets equating to about 220 per cent of gross domestic product, according to the IIF's calculations.
The recovery will be fuelled by the second-fastest vaccine rollout in the world (behind Israel), with a target in place to immunise more than half of all residents by March and 90 per cent by the end of June.
It will be supported by reforms aimed at developing a knowledge-driven economy, which "will increase productivity growth and boost the supply of highly qualified labour, which is needed to raise potential growth", the IIF said.
Digital transformation is also opening up opportunities, with the UAE ranked sixth globally in the World Economic Forum's Index on Information and Communications Technology. On Friday, the UAE's Ministry of Economy also said the UAE ranked fourth worldwide in the 2020 Global Entrepreneurship Index, produced by the Global Entrepreneurship Monitor.
The country will "ensure the integration of new business models into the activities of entrepreneurs to improve their performances, make them globally competitive and enable them to keep pace with global developments", Mr bin Touq said.