Powering Ahead

a strong finish to 2022 led by a strong economic rebound on higher oil prices and production as well as the recovery in tourism, construction and non-oil activity linked to the Expo 2020 Dubai.

“Looking ahead, the UAE economic outlook remains positive supported by domestic activity,” the IMF said last November while projecting that GDP growth will reach 5.1% in 2023 and nonhydrocarbon growth is forecasted to be around 4%.

The UAE has remained relatively insulated from the global economic downturn with the Gulf state projected to maintain aboveaverage growth in 2023 to become the best-performing economy in the Middle East region. Economies around the world have been grappling with a multitude of shocks—from the war in Ukraine to soaring COVID-19 cases in China—that have sent inflation soaring and weakened activity.

The International Monetary Fund (IMF) forecasted that global GDP growth will slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023—the weakest growth profile since 2001. Meanwhile, the UAE enjoyed

Though the world’s largest economies face heightened recession risks, the UAE’s strong reform momentum provides an upside risk to growth and the federal government is leaving no stone unturned in its efforts to diversify the economy away from heavy reliance on oil revenues.

The UAE, the Middle East’s leading business and tourism hub, has introduced a series of reforms over the past few years to increase foreign direct investment and make itself more attractive for foreigners to live and work amid growing competition from its GCC neighbours.

The performance of the UAE’s banking system improved last year on the back of lower cost of risk and higher interest rates and profitability is expected to reach pre-pandemic levels in 2023. However, the increasing risk of recessions in the US and Europe along with higher interest rates could pressure the operating environment.

Financial matrix

Banking sector

UAE banks are entering 2023 ‘on solid footing’ despite higher uncertainty. Banks in the Emirates reported higher profits on the back of improving operating conditions marked by economic recovery and the central bank’s moves to tighten monetary policy.

“Banks’ performance improved in 2022 on the back of lower cost of risk and higher interest rates,” S&P Global said in January while noting that the central bank’s Targeted Economic Support Scheme (TESS) helped the banking system through a period of stress, limiting the increase in nonperforming loans (NPLs). The benefits are expected to continue this year.

The combined profits of the UAE’s top five banks—First Abu Dhabi Bank (FAB), Emirates NBD, Dubai Islamic Bank (DIB), Abu Dhabi Commercial Bank (ADCB) and Mashreq Bank—reached $8.5 billion (AED 31.4 billion) in the nine months of 2022.

FAB, the UAE’s largest lender by assets, reported a 19% increase in 9M 2022 net profits to nearly $3 billion (AED 10.9 billion), Emirates NBD registered a 25% y-on-y increase in profit to $2.5 billion (AED 9.1 billion), DIB’s net profit soared by 34% to nearly $1.11 billion (AED 4.1 billion), ADCB saw it net profits in the nine months to the end of September jump by 22% y-on-y to $1.3 billion (AED 4.7 billion) while Mashreq’s net profit reached $708 million (AED 2.6 billion).

S&P Global said that net interest income—the difference between interest revenues earned from lending activities and interest paid to depositors—at UAE’s banks has soared over the quarters as lenders are passing rate increases on to customers.

The Central Bank of the UAE (CBUAE) hiked its base rate by fifty basis points to 4.4% in December after the US Federal Reserve raised its interest rate by half a percentage point marking one of the most aggressive years in monetary policy history as central banks heightens their fight against inflation.

The UAE’s financial institutions have adequate capital overall and abundant liquidity while their asset quality has improved modestly from pandemic-era peaks. However, pressures on small banks’ profitability, alternative delivery channels and competition from digital banks are expected to increase shareholders’ appetite for consolidation to enhance the resilience of banks’ financial profiles.

Digital banking is swiftly changing the field of play in the UAE financial services sector where incumbents are facing increasing competition from neobanks and challenger banks which are billing on

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Digitalisation in the UAE financial service market is partly being driven by tech-savvy customers and regulatory initiatives such as regulatory sandbox and open banking—which are creating an enabling environment.

Fiscally fit

The disruptions to oil trade and output that followed the war in Ukraine have driven up the cost of commodities while contributing to cost-of-living crises around the world. However, in the UAE, the oil boom has had the effect of pushing budgets into customer experience as their point of sale.

KPMG said that financial regulators are keen to align the country’s digital agenda with the country’s banking industry operations as neobanks, like the homegrown Zand, are focusing on streamlining operations to conduct highvolume digital transactions.

The leading neobanks in the UAE include RAKBANK-backed YAP, ADQ-owned Wio, Shariah-compliant Zand Bank and Abu Dhabi-based Al Maryah Community Bank. These challenger banks are competing with several speedboats including Emirates NBD’s Liv., Mashreq Neo and DIB’s rabbit.

The UAE is about to roll out its National the black after the economic impact of the pandemic while creating an ideal environment for the country to proceed with ambitious reforms under favourable macroeconomic conditions.

Global benchmark Brent traded mostly above the $100-mark last year and JPMorgan projected that it would average $90 per barrel in 2023. The UAE, the Arab world’s most competitive economy, approved the federal budget for the fiscal years 2023-2026 last October with a total expenditure of $68.69 billion (AED 252.3 billion).

The Gulf state forecasted total revenues of $69.6 billion (AED 255.7 billion) over the

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IN BAHRAIN bahrainairport.bh period while revenue and spending for 2023 will grow by an estimated 11% and 4%, respectively. The finance ministry said that the cabinet approved the budget for the fiscal year 2023, with a total estimated expenditure of $17.2 billion (AED 63.06 billion) while total revenues are projected at $17.3 billion (AED 63.6 billion).

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The UAE allocated $572 million (AED 2.1 billion), 3.4% of the total general budget, towards the financial investments sector, including $205 million (AED 753 million) which will go towards federal investment projects.

The federal government, which sold its first bond in its half-century history in 2021, returned to international bond markets last October with the CBUAE receiving bids worth $2.1 billion (AED 7.57 billion). The debt is rated Aa2 by Moody’s— the third-highest investment grade and one step lower at AA- by Fitch Ratings.

Sustaining growth

The increased global uncertainty is driving foreign investment inflow into the UAE while contributing to rapid real estate price growth in some segments. The country is set to host the World Trade Organisation’s (WTO) 2024 ministerial conference, the largest global gathering of trade ministers.

The gathering scheduled for February 2024 will come at a critical time as the global economy is being confronted by a confluence of challenges including the war in Ukraine, an ongoing pandemic and a simmering trade war between the US and China—the world’s two biggest economies.

For the Emirates, hosting WTO’s 13th ministerial conference is part of a broader strategy by the government to burnish its credentials as a global hub for business. The government has been rolling out bilateral trade deals with fast-growing markets since the pandemic.

The UAE signed a wide-ranging economic pact with India in February 2022. The trade pact, called CEPA, removed duty on almost 90% of goods traded between the two states and it is expected to boost bilateral trade from $60 billion to $100 billion within the next five years.

The Gulf state is home to some of the world’s biggest wealth funds including Mubadala Investment Company, Abu Dhabi Investment Authority, ADQ and Investment Corporation of Dubai. Buoyed with cash from last year’s commodity boom, the UAE is investing billions of dollars in Egypt, Indonesia, Sudan and Jordan to diversify its economy away from crude.

Structural reforms

In a major policy shift, the UAE said that it will levy a 9% federal corporate tax on business profits exceeding $102,110 (AED 375,000) for the first time starting 1 June 2023, as the Gulf state moves to align itself with new international standards, particularly the move toward a global minimum tax on multinational corporations.

The ambitious plan, which will see the UAE ditching the tax-free regime that made it the Middle East’s business hub, aims to eventually set 15% as the base levy to would negatively affect the credit profiles of companies operating in the country.

The government also revamped its Commercial Companies Law by scrapping a law that required an Emirati shareholder or agent when foreigners are opening a company in the country. The UAE’s new company law came into effect last June and it is expected to boost the country’s economic competitiveness.

The UAE plans to offer Emirati citizenship and passport to a set group of foreigners, including investors, professionals, and special talents – a first in the Gulf region as the government looks to give its huge expat population a bigger stake in the economy to drive growth. The country also approved regulations on the entry and residence of foreigners last April formalising a process aimed at giving expatriates a bigger stake in the economy.

The Gulf state’s residence schemes and entry permits now include the golden residence scheme, green residence, five- stem international competition to offer more attractive rates.

Fitch Ratings cautioned that the UAE’s federal corporate tax could have uneven credit implications on rated corporates, with privately-owned corporates and government-related entities rated on a bottom-up basis most affected.

Moody’s also said that although the introduction of a corporate tax will broaden the federal government’s income base, it year residence visa, job exploration entry visa as well as multi-entry business and tourist visas that do not require sponsorship.

Over the years, the UAE has implemented a raft of economic and structural reforms, including issuing citizenship to foreigners, to attract investment, foreign talent, enhance competitiveness and maintain its global trade and business hub status amid growing competition from its equally ambitious Gulf neighbours.