A wide range of data sources are highlighting the vibrant state of the UAE economy. Consumer spending is growing strongly, particularly in the online space. Tourism is a key supporting factor, with visitor spending recovering sharply, and hotel occupancy and pricing rates also robust. Strong public sector transport data points to the broad-based nature of the economic rebound, while the real estate market is also buoyant. Meanwhile, public finances are benefitting from the oil price windfall, which provides a strong foundation for continued optimism from both consumers and corporates. UAE private sector employment has grown 9% yoy.
In this note, we dig deeper into these trends, highlight how investors can gain exposure through both the fixed income and equities markets, and flag some key risks to the investment case.
The UAE economy is booming
Recent PMI data support the view that the UAE economy is experiencing a strong post-pandemic bounce-back. The reading was 55.4 in July, marking 20 straight months of expansion. Meanwhile, Dubai’s July reading of 53.2 was the highest since November 2019.
UAE Central Bank data support this positive view, with the value of consumer-to-consumer bank transfers up 27% yoy, cheque-based transaction value rising 12% (all data as of Jan-May 2022). Public transport data also point to a broad-based recovery in economic activity. According to RTA data, the number of public transport journeys in Dubai reached 304.6mn in H1 22, up 51% yoy and 3% above H1 19.
The Bloomberg-compiled private sector consensus for 2022 real GDP growth stands at 5.6%, up from 2.3% last year. If achieved, this would mark the country's fastest growth in over a decade. We note that Dubai's GDP increased by 5.9% in Q1 22, driven by massive growth in the transport, hotel and leisure sectors. Together with the additional data points highlighted below, this suggests the strong growth forecast is reasonable unless there is a sharp slowdown in the last few months of the year.
Projected real GDP growth of 5.6% this year and 4.9% in 2023 places the UAE in the top growth quartile among emerging economies for both years. Other fast-growing markets include neighbours Saudi Arabia and Kuwait, plus India, Vietnam and the Philippines.
Employment is rising
The UAE Ministry of Human Resources and Emiratisation recently disclosed that private sector employment grew 9% in the year to June 2022, to 5.4mn workers. In Q2 22, 0.54mn new work permits were issued (up 27% yoy) while 0.30mn work permits were cancelled (-8% yoy). The construction sector was the biggest driver of job growth in Q2 22, and is also the biggest employment sector overall, accounting for 26% of the total private sector workforce. Other large employment sectors include trade and repair services (21% of the workforce) and business services (19%).
Consumer spending is growing strongly
Majid Al Futtaim’s State of the UAE Retail Economy survey looks at 726mn point-of-sales (POS) transactions totalling over AED167bn (US$45bn) across 5mn shoppers. This sample accounts for around 10-15% of total UAE transactions and hence around a quarter of all POS transactions.
H1 consumer spending was up 22% on last year. Retail spending was up 16%, driven by more discretionary items, such as fashion. Non-retail spending was stronger still, up 31% yoy. The key driver was leisure and entertainment spending, which rose 56% yoy, driven by a 171% increase in spending at tourist attractions, and a 94% increase in spending at cinemas.
Momentum slowed a little in Q2, with consumer spending growth up 15% yoy. But this is still 10% above the corresponding period in 2019.
H1 footfall in MAF’s shopping malls increased 15% yoy, but this represents a 6% decline on H1 19. One of the factors behind this may be the ongoing rise in e-commerce (see below), in addition to a broadening of the leisure options in the country.
E-commerce is taking market share
Overall e-commerce transaction value rose 41% in H1 22 and now accounts for 11% of all spending, up from a 9% share last year. The share of hypermarket/supermarket sales being made online has risen to 13%, from 10% last year. Notable growth areas include fashion and leisure/entertainment.
The tourism sector is seeing robust growth
Dubai tourist numbers increased 180% in H1 22 versus H1 21. Indeed, the number of visitors in this period was just 2% shy of the figure for the whole of 2021 and was just 15% below the H1 19 figure. These tourists are also spending more to stay in the Emirate, with average room rates up 48% to USD154 per night.
Several key markets are still to recover to pre-pandemic levels, notably China and the Philippines, but also India and Germany, which suggests that there is scope for further growth in volume in H2 and beyond. In contrast, two markets that have picked up substantially relative to pre-pandemic levels include Israel, which is benefitting from more cordial relations with the Arab world, and Kazakhstan.
On a per person basis, Americans, Brits and Saudis spend more than average, while Omanis, Pakistanis and Indians spend the least. According to Majid Al Futtaim, average spending per tourist is up 34% on H1 19 levels.
Dubai Airports traffic data is consistent with these strong trends. 27.9mn passengers passed through Dubai International Airport in H1 22, up 162% on H1 21 and just 4% shy of the FY 21 figure. The main destinations were India (4mn), Saudi Arabia (2mn), the UK (1.9mn), Pakistan (1.7mn) and the US (1.4mn). 155k flights passed through the airport in H1 22, up 56% yoy and just 13% shy of the H1 19 figure. The volume of handled baggage was 23% below the H1 19 level.
Dubai Airports expects 62.4mn passengers for the full year (ie 114% yoy growth) and 77.8mn in 2023 (25% yoy). The airport plans to exceed its pre-pandemic run rate at some point in 2023. In 2019, Dubai International Airport handled 86.4mn passengers.
Real estate transactions have been breaking records
According to Fam Properties, the number of Dubai residential real estate transactions so far this year has increased by 51% versus the corresponding period last year. CBRE notes that transaction volume in the January-July period has been the highest since 2009. Average sales prices have increased by 9.9% in the year to July 2022, while rents have increased by 24%, which is the fastest pace since May 2014 (based on CBRE data).
Property prices are still around 25% off their 2014 peak. Despite rising interest rates, June was the strongest transaction month of H1. But further rate hikes will no doubt provide additional headwinds as we move through the year.
Key risks
As an open economy that is dependent on significant trade and tourist flows, and benefits from high hydrocarbon prices, the UAE is clearly exposed to the broader global environment. With central banks struggling to gain control over inflation, a key risk, therefore, is that higher interest rates tip the world (or large parts of it) into recession. Rising risk aversion is also driving US dollar strength, which (given the AED-USD peg) damages the UAE’s competitive position across areas such as tourism and real estate. Geopolitical risks also need to be taken into consideration, with the deadline over Iran’s nuclear deal looming large, and Israel-Palestine tensions rising sharply in recent weeks.
Investment options
UAE capital markets are much broader than in the past. This trend is likely to continue as the IPO train continues; recent press reports suggest Dubai toll operator Salik could come to market in the near future.
We highlight below some avenues for investors to gain exposure to the positive trends highlighted above, via both fixed income and listed equity instruments. We do not provide an investment opinion on these securities.
Corporate bonds
We highlight below 17 tradeable bonds with exposure to the UAE growth story. These instruments span a range of sectors, maturities and structures. All are USD-denominated. Yields have risen by around 175bps so far this year, reflecting the rise in US interest rates over this period. From a yield perspective, standouts include Dubai Aerospace, Emirates NBD, Galaxy Pipeline, MAF, Arada and Sweihan Power.
Listed equities
We present in the following table some high-level metrics for 24 listed equities with exposure to different parts of the UAE economy. These shares have risen by a median of 6% so far this year; the outperformance versus global markets reflects the favourable impact higher oil prices have on the economy, via improved public finances and stronger private sector sentiment.
From the perspective of valuation multiples, names worth highlighting include Du, Emaar Properties, Emirates NBD, Fertiglobe.
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