In April 2020, existing market oversupply was compounded by a Covid-19 related collapse in global demand, causing the price of oil to plummet to $20 a barrel, with negative levels recorded in the U.S. for the first time. Demand has been slower to recover than many expected and given the very large supply overhang, the market will take considerable time to rebalance.
Sustained low oil prices since 2014, combined with the precipitous decline wrought by Covid (and briefly the Saudi Arabian-Russian price war), has put the petro-state economies of the Arabian Gulf region under severe strain. Beyond the direct implications for the oil price, Covid has also brought an abrupt suspension to regional tourism and slowed inward investment.
The United Arab Emirates’ (UAE) economy is the most diversified of the region and is therefore the most exposed to the full impact of the Covid crisis. Abu Dhabi, the largest Emirate, is home to 90% of the UAE’s oil reserves. Moody’s estimates that the Abu Dhabi economy will shrink 5.3% in 2020 as a result of the collapse in the oil price.
Dubai, the UAE’s second largest Emirate, has limited oil resources and has very successfully diversified its economy away from a reliance on hydrocarbons by styling itself as a luxurious regional safe haven, protected from the instability of the wider region, and boasting hi-tech commercial infrastructure. It is also a glamorous tourism destination and global transportation hub.
In late March 2020, the UAE government suspended the arrival of international flights, initially allowing only citizens to return. These protective measures have brought a temporary halt to the country’s tourism sector, which accounts for 12.4% of GDP. With quarantine and other restrictions still in place, and fears of a second wave of infection, the timescale for the restoration of Dubai’s tourism footfall is uncertain.
To add to Dubai’s woes, there is evidence that foreign investor confidence has suffered in recent months. From February through April 2020, Dubai Foreign Markets saw significant foreign selling as a market flew into a panic, with a record shortfall in investments and fund inflows recorded in March. The sharp fall in oil revenues has also suppressed capital inflows from neighboring states.
The recent, Covid-related economic downturn has shunted Dubai’s already beleaguered economy closer to the brink. Unlike the spectacular collapse of 2008, the economy has been in slow decline since 2014. The health of Dubai’s economy is always closely reflected in the Emirate’s real estate market, which has experienced a 30% decline from 2014 highs.
Government efforts to stimulate the property market, such as the UAE’s 2019 golden visa initiative, have yielded very little upside. The Expo 2020 trade conference, which had been heralded as the economy’s savior, has now been postponed because of the virus.
While Dubai’s near-term outlook is bleak it will nevertheless ride out the storm. It remains unrivaled as a regional hub for foreign investors, enjoying political stability, excellent commercial and transportation infrastructure and is perfectly positioned to allow investors to serve more challenging markets in the Middle East, sub-Saharan Africa and south Asia. Its survival may require another bail out from Abu Dhabi, which would certainly oblige to protect the UAE’s brand, despite its own fiscal pressure.
For more information on Gryphon's MENA team and Global Strategic Advisory practice, please contact Victoria Mackay firstname.lastname@example.org