The UAE leads Gulf countries in its attempt to diversify its economy away from hydrocarbons, but the country is still overreliant on the energy sector, say analysts at ratings agency Standard & Poor’s.
“The [UAE] economy appears [to be] the most diversified in the GCC,” said the report. But “in our opinion [it] remains dependent on hydrocarbon revenues”.
The need to diversify away from energy is a high priority for the country’s rulers, who have used sovereign wealth funds to support new industries.
In Abu Dhabi, Mubadala Development has acted as a key investor to develop non-oil industries, including light manufacturing and aerospace, while the Investment Corporation of Dubai invests in the emirate’s real estate, transport and retail sectors.
The UAE’s rulers have stated their aim to move towards a “knowledge-based economy”, as part of the country’s “Vision 2020” development plan.
The Government has sought to build national champions in key industries – most notably Arabtec in the construction sector, and Etihad Airways in aviation.
The report said that the UAE has a “relatively high” fiscal break-even price of US$80 per barrel, meaning that the country will run a deficit if the price of oil falls below this level. This break-even point is higher than Saudi Arabia, Qatar, Oman, Kuwait and Bahrain.
However, the country has 81 years of known hydrocarbon reserves, at its current levels of production, which means that diversification is less urgent than for other Gulf nations. Bahrain and Oman have 11 and 21 years of reserves remaining at current levels.
Only 5 per cent of Dubai’s economy is accounted for by oil and gas, which has encouraged the emirate’s rulers to develop other key industries – largely tourism, real estate, logistics, and aviation – in a bid to keep growth rates high.
This has helped to decrease the country’s reliance on hydrocarbon exports by 15 per cent since 2001, as other industries have grown in importance.
S&P’s analysts point out, however, that much of the diversification taking place in the Gulf is in downstream segments of the energy industry – refining, marketing and distribution of energy products. Although technically contributors to an economy’s non-oil sector, downstream industries will still be affected by changes in the demand for oil.
The analysts conclude that diversification away from oil and gas could boost the credit ratings of Opec states, including the UAE.
Abu Dhabi earns 65 per cent of its revenues from the oil and gas sector.