There’s a huge amount of speculation floating around regarding the economic crisis – particularly in the US and Europe. While it might well roll across those parts of the world, are we likely to see it darken the shores of the Middle East?
We have to be careful making predictions because the situation is very fluid, but there are some factors that may well shield the Middle East – and the UAE – during this period of mounting inflation.
Will the recession slow the Middle East down?
A recession, according to the International Monetary Fund (IMF), is a period of declining economic activity. Most analysts define a recession as two consecutive quarters of a nation’s GDP declining after accounting for inflation.
In contrast to many other countries in the world, Saudi Arabia’s economy is anticipated to be among the fastest-growing in the world this year. The country’s gross domestic product is predicted to grow by 7.6 per cent, with inflation kept at 2.8% in 2022. This is all in an economic environment where the prices of goods, especially imported ones, are skyrocketing.
In the UAE, local banks have limited exposure to the Russian and Ukrainian banks that have become hamstrung by the conflict between the two counties. While it’s impossible to be completely shielded from higher interest rates, according to Garbis Iradian, Chief Economist, MENA, IIF, “Growth in credit to the private sector will remain robust given the improvement in the liquidity of the banking system and stronger demand for credit.”
2021 was also a very positive year for the Emirates, with GDP up 3.8 % and predicted to reach 5.4% in 2022, so we’re well positioned to weather the economic storm that much of the world will experience. With a growing sector that provides business setup services and additional support through free zones, the UAE continues to be a leader in bringing innovative businesses into the country – not only boosting expertise but also maintaining economic growth.
While Saudi Arabia is the greatest contributor to the Middle East economy, the UAE is predicted to outpace all other countries in the region in terms of growth over the next 12 months.
Will the UAE property market continue to grow?
In the first quarter of 2022, Dubai saw a surge in real estate investment to the tune of $4 billion, with Abu Dhabi in hot pursuit, recording property sales totalling $3 billion in Q1. This widespread increase in investment across the UAE is a promising sign, not only that foreign investment is available, but that the UAE can continue to diversify its economic strength and reduce its reliance on oil – however useful the latter might be in the present moment.
It is also important to note that the property market has been supported through UAE government initiatives that make the nation a great place to invest and live. In particular, steps have been taken to make visa applications easier, and this lowering of a primary barrier to entry has seen foreign investment climb to new heights. In fact, the number of people registering an interest in Dubai real estate has increased threefold.
How much will energy prices play a part?
With 30% of the UAE’s GDP being generated by the sale of hydrocarbons (oil to you and me), it’s clear that energy prices are going to play a big part in how we fare in the midst of a global financial crisis. Other factors, including the war in Ukraine, are playing a significant role in catalysing the financial crisis, as the conflict is increasing the cost of living and the price of doing business across the globe.
While the UAE continues to diversify and grow different elements of its economy, the country still has a reliance on oil. This isn’t necessarily a bad thing, from a purely economic viewpoint. Early in October this year, OPEC announced a 2 million barrels-per-day reduction in oil production. This is a significant cut, representing approximately 2% of the current global oil supply. An increase in oil prices seems inevitable in these circumstances.
At the same time, because tensions with Russia are so high and sources of fuel are limited by the sanctions imposed on them, the UAE, as a supplier, has inherited a greater market share. It’s important to note this reality – it isn’t necessarily something to be celebrated, but it’s a significant shaper of the local economy.
Does crypto have a place in the Middle East’s buoyancy?
In times of financial instability, investors look to shield themselves from risk by investing in assets that are usually unaffected by macroeconomic circumstances. The classic example is gold, the market that has traditionally underpinned currency in many countries. Crypto certainly isn’t stable – the ups and downs of its most famous currency, Bitcoin, are enough to demonstrate that, while other cryptocurrencies have disappeared without trace.
However, we have seen the crypto market make people very rich when they get the timing right, and one of the great lures of the sector is that it isn’t supposed to be influenced by the wider banking and investment environment. The skyrocketing cost of energy will play a big part in the cost of the crypto-mining process, but this, in theory, should also cause cryptocurrencies to climb in value. Because most of the popular crypto investments are finite by nature, if the cost of production rises, the value of existing assets should also rise. This could equal big gains for investors.
The UAE has already demonstrated that it is becoming a global crypto hub, with the digital economy contributing 4.3% of its total GDP. Because of this, we could see further investment in our nation’s crypto infrastructure and experts, helping us thrive while other countries are struggling.
There’s a good chance the Middle East can buck the trend
I’ve only scratched the surface of some industries and investments in this piece, and there’s clearly a lot more detail waiting to be uncovered beneath the surface. But, what is absolutely clear is that the primary economic driver of the region, oil, will continue to allow countries in the Middle East to flourish and rededicate the proceeds from its sale to other industries, such as tourism and real estate.
A growth in tourism income can lead to greater property investment, and greater property investment can lead to more business startups, bringing an influx of additional foreign capital and skilled workers. And that money can be used to draw the best and brightest to the UAE and the rest of the Middle East to develop the technologies of the future, such as blockchain and cryptocurrency.
It might not be smooth sailing, but we’re certain we will never be far from shore in the coming storm.