Meeting Future Energy Challenges - Diversification And Policy Shifts In The UAE

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Includes: OIL, USO
by: Global Risk Insights

The global drop in oil prices has left government reserves in jeopardy in multiple nations, wreaking havoc on national budgets as a plethora of oil floods an already oversaturated market. While examining the volatile oil environment's impact on the United Arab Emirates (UAE), it is worth assessing the government's reactionary and preventative policies being formed to confront upcoming challenges.

Amidst violence and political uncertainty across the Middle East, the UAE maintains a strong reputation of stability that draws tourists and facilitates economic investment. The country fosters an image of security and prosperity. How will this reality continue to be managed in face of low oil prices and possible economic strain in the short-to medium-term? Like so many other economies that rely on a sole, unpredictable source of income, diversification is key.

Impact on the economy

At the end of February 2016, the oil mark dipped due to investors withdrawing gains. However, prices ultimately ended at higher levels than at the start of the year. The IMF exhibited a projection for the first quarter of 2016, demonstrating that UAE growth is expected to shrink in connection with the fall in global oil prices. On a more granular level, the shrinking oil price could inhibit business growth, while instigating beneficial government policies to confront losses. While the volatility of the oil market especially impacts sectors with large percentages of government funding tied to it, the downturn has the opportunity to alter daily life in the UAE.

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Income sources and budget cuts

Plans are underway for the proposed (January 2018) implementation of a five percent value-added tax (VAT) in the UAE, encouraging all the other Gulf Cooperation Council (GCC) countries to follow suit. While some food items, education and healthcare would be excluded, authorities plan to use the minimal tax increase as a way to build up government assets.

While this measure carries some obvious benefits, it also sparkes grounded fears that VAT could impact the profitability of small and medium enterprises (SMEs), thereby impeding the economy's growth. In addition, the move could reduce profits for foreign companies, leading to possible decreases in foreign investment. There would be few business ventures that would not be touched by the VAT.

While details for any further taxation strategies have yet to come to light; Head of IMF Christine Lagarde visited Abu Dhabi recently and stated that tax on personal income could lead to lasting benefits. Nonetheless, government sources recently stated that no such plan is currently in the pipeline.

Emiratis have traditionally been provided with large subsidies by the government, including on education, healthcare, and low-cost of utilities. A possible repercussion with cutting benefits is a rise in discontent in societies used to a high level of governmental support. It remains to be seen whether or not any related changes to government budgets and thereby benefits could upset the status quo.

Response from UAE leadership

Rulers including his Highness Sheikh Mohammed bin Rashid al-Maktoum, ruler of Dubai and Vice President and Prime minister of the UAE, and Sheikh Khalifa, the president of the UAE and Emir of Abu Dhabi, have responded to the impacts of the oil glut by leaning into strategic diversification.

Sheikh Mohammed has long since used modern social media to disseminate information and news regarding developments in Dubai and the UAE. In February, Dubai's ruler went to twitter to announce that a UAE 'post oil summit' was a success, designating efforts to build human capital as the way to guarantee ongoing prosperity across the emirates. What followed was the implementation of the greatest structural changes to the UAE's governing bodies in its history. These changes together constitute a starting point from which to tackle modern issues and move beyond a reliance on oil, as Sheikh Khalifa approved the installation of ministers for of Happiness, Tolerance, the Future, Climate Change, and a Minister of Youth.

Rising global temperatures will potential jumpstart drought in the Gulf and beyond, sparking a myriad of related tensions. Therefore, the UAE is active in renewables development, focusing on future requirements. Solar energy lies at the center of sustainable energy solutions in the Emirates, with the largest solar energy field in the Middle East located near Abu Dhabi. The Emirate of Dubai has a mega solar project underway as well. As the two most populous business centers in the UAE, Dubai and Abu Dhabi are therefore making strides in the region to minimize carbon emissions and switch to renewable energy sources.

Concluding thoughts

Small level shifts, readjustments and taxation tweaks are likely to be visible in the short-to medium-term future, however, major diversification and human capital initiatives continue to drive the UAE past a dependency on oil into the long term. Simultaneously, large-scale structural changes are being implemented to the governance system, with future needs of the Emiratis and expat residents kept in mind.

With a population that amounts to approximately 15 percent of all residents, the Emiratis are accustomed to receiving government subsidies to bolster a high quality of life. Should these benefits be tampered with, discontent could begin to grow. However, the installation of ministers to tackle related issues, along with a clear focus on economic diversification and a move away from oil-reliance, the UAE is well-equipped to tackle challenges to come.