New UBS Report Reveals Key Factors for Emerging Markets Competitiveness


UAE economy on a recovery path thanks to ongoing fiscal stimulus measures, spending related to hosting Dubai Expo 2020, rate cuts, and continuing diversification efforts.

The credit fundamentals of the sovereigns in the Middle East and Africa have remained fairly stable in 2019. The outlook for the region for this year and next remains fairly solid, according to the latest UBS Chief Investment Office report on emerging markets.

The impact of trade tensions on investment, the ongoing slowdown in the Eurozone, and a more challenging backdrop for the energy market have served as impediments and remain major risks particularly for oil-driven economies in the region. But inflation has fallen even lower and enabled many central banks to cut interest rates to support credit growth and government fiscal metrics have remained stable on aggregate thanks to prudent fiscal management and healthy nominal GDP growth.

The outbreak of the coronavirus had a limited direct impact on the economies and societies in the GCC so far, but it might still weigh on these countries indirectly, through its negative impact on global growth, energy and basic material prices, and consumer spending, for example in tourism. We believe the downside is contained, but acknowledge the risk that the virus might spread further and faster, with a more significant impact on the global economy. In this case, the spillover effects on the UAE will be larger too, and the risk for more infections locally would also rise.

In the current global context,which is marked by increasing climate change and social risks the role environment, social, and governance (ESG) risks play in credit risk assessment is critical-more than ever before.The level of exposure to ESG risks may vary depending on factors such as governance standards, poverty levels and income inequality. Whileoil-driven economies may be less affected, they are not immune to those risks as they face a pressing need for transition towards renewable energies.

Michael Bolliger, Head Asset Allocation Emerging Markets commented: “The countries in the Gulf Cooperation Council (GCC) currently benefit from lowUS interest rates, and we see a very low likelihood of exchange rate pegs coming under pressure. But volatile oil prices, which have a strong impact on public finances, and geopolitical risks will continue to pose challenges for the region in the coming years. The need for reforms remains high, in our view.”

The commodity-producing countries in the region also face environmental and social challenges. Growing calls to tackle climate change, combined with major technological advances from fracking and renewable energy sources, mean growing competition for energy producers in the Middle East and elsewhere. This impacts the creditworthiness of affected sovereigns directly by lowering revenues, export proceeds, and economic growth;and indirectly by increasing the pressure on them to adjust growth models to these changing realities and create jobs in the private sector that go beyond existing labor market nationalization policies.

On the prospects for the UAE, Ali Janoudi, Head of Wealth Management Middle East and Africa said: “The UAE economy is on a slow recovery path from the 2014–2017 oil shock, and significant fiscal buffers remain in place. Headwinds will persist this year and next due to lingering trade tensions, the global economic slowdown, low energy prices, OPEC-led production cuts, and regional tensions. We expect ongoing pressure on the local real estate market to ease in 2020, but the construction sector is unlikely to see a significant rebound this year. Growth should, however, pick up somewhat thanks to the ongoing fiscal stimulus measures, spending related to hosting Dubai Expo 2020, rate cuts in line with the Federal Reserve, and continuing diversification efforts.

UAE ‘s key credit strengths include a history of domestic political stability, a high GDP per capita, and hydrocarbon reserves of more than 70 years at the current rate of production. The Economy is fairly diversified, but growth and public finances still depend on hydrocarbon exports and oil-driven liquidity in the region.

The UAE is moving towards the right direction by making reform and diversification efforts along with other countries such as Saudi Arabia, Egypt, Morocco, among others and growth is expected to pick up in 2020.


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