The UAE is one of the strongest performing economies in the CEEMEA despite the volatility in global markets. Simon Williams, Chief Economist CEEMEA at HSBC explains what is driving this growth in the UAE.

Abu Dhabi

HSBC has identified the United Arab Emirates (UAE) as one of the strongest performing economies in the region, attributing its success to both short-term growth momentum and long-term structural reforms. The analysis notes that while recent interest rate cuts by GCC central banks, following the US Federal Reserve, provide some support, fiscal policy and government spending remain the primary drivers of economic activity in the region.

The report also highlights that Abu Dhabi is currently outpacing Dubai in growth, marking a rare period where both emirates are performing strongly. In Saudi Arabia, a recalibration of capital spending is underway in response to lower oil prices, with the focus shifting to more sustainable fiscal strategies. Additionally, there is growing interest from Asian investors, particularly from China and Hong Kong, in Gulf markets, which is expected to boost foreign direct investment and portfolio flows.

HSBC: UAE one of the strongest performing economies

Maybe let's just start quite simply with the impact the rate cuts, the Fed rate cut is going to have on GCC economies. Many GCC central banks obviously followed suit and cut by 25 basis points as well. Is this a tailwind for the region? Does it move the needle much? It moves the needle a little. I guess it will offer a couple of caveats. First of all, this is a part of the world where it's fiscal policy, not monetary policy, that really makes the difference. 75 bps of a cycle, it's not going to really make much difference to domestic demand. Far more important is what governments decide to do with their spending decisions and here obviously it's the oil price rather than what the Fed does with rates, which is key. I guess the second caveat I'd offer is if the UAE, the Gulf, was running its own monetary affairs, this is not a stage in the cycle where I'd be expecting them to cut. Growth is really strong right now. We're probably up, potentially, we've got a few worries about asset price, asset price bubbles there as well. So perhaps this isn't a space where I'd be that keen on seeing significant additional cuts in rates. Interesting. Okay, so you say that there may be signs that bubbles emerging. Do you see those signs or is it just being cautious in the event that further rate cuts could be destabilizing for financial stability? For now, I'm reasonably relaxed and 50-75 bps of an easing cycle isn't going to make that much difference. As I say, fiscal policy rather than monetary policy is what's key. But again, we talked about monetary policy being restrictive over the last year or so and in real terms rates have been quite high. But economies here have been growing really, really well. Asset prices have been very strong here as well. So I repeat, if this was an environment where the central banks of the region made their own monetary choices, there wouldn't be much of an argument for a cut right now. Yeah, let's talk about the strength of the economy. In your report, you said that UAE is one of the strongest performing economies in the Semia. How much of this is cyclical versus structural? I think it's both. UAE has had a really good, and since the pandemic really, it's had a very strong upward shift in growth. There's momentum running through that short-term growth story. The region's protected by these big buffers that guard it against external shock. The politics that have been so destructive to other parts, seemingly other parts of the world in terms of trade flows, haven't really hurt us here. But yeah, there's undoubtedly a big structural reform program that's been running here. And it's probably in its seventh or eighth year and I think a lot of what you're seeing in terms of growth, the pickup in potential growth, comes back to these big structural reforms. And Abu Dhabi, the fastest-growing emirate, growing faster than Dubai, how significant is that, do you think? That's not my data, that's what the emirate-level GDP data shows you. I think Abu Dhabi is perhaps at a slightly earlier stage in that spending cycle, investment spending in particular. It's still really gaining pace. There are time waits beginning to mature elsewhere in the UAE. But I guess part of my enthusiasm, my optimism for what's happening around the UAE, this is the first time in my 30 years of working on the region that I've really seen both Abu Dhabi and Dubai firing at the same time. Both engines of the UAE economy are firing really well. Okay, so UAE firing on all cylinders, at least Abu Dhabi and Dubai are, in terms of the emirates. Let's talk about Saudi Arabia. Obviously this has been a year of reprioritization, recalibration, so those big spending, the spending on the mega projects, the backdrop is lower oil prices from the beginning of the year. How do you see the outlook for Saudi Arabia from a fiscal perspective over the next 12 months? Oil at $65, $70 a barrel, allowing for some of the increases in production that OPEC plus has sanctioned. I'm looking for a budget deficit around 4, 4.5% of GDP, not small, but given the strength of Saudi's balance sheets and the growing variety of funding options it has at its disposal, that's a funding need that can be pretty readily met. But I do see a bit of a shift in that Saudi cycle. Growth is still strong, the Q2 GDP data was pretty strong, but I can see some signs of a little softening in terms of sentiment and obviously reprioritizing, recalibrating that capital spending cycle is a big part of Saudi policy thinking right now. If we look at the contracts being signed for new work, the data shows there's been a bit of a slowdown there. I was going to say, if they are recalibrating or spending less or allocating less capex expenditure to certain projects, is that not going to have a macroeconomic effect as well on the GDP level of the economy? Perhaps I've always been a little cautious in terms of the kind of capital spending that I've been expecting from the Kingdom. I think we're pushing up towards 30% of GDP, that's about as much as I would expect the Saudi economy to be able to absorb. What I'm looking for isn't a drop-off in capital spending, what I'm looking for is a slightly slower pace of which capital spending actually rises and a real focus on whether capital spending goes to. So you just told me offline you were in China twice in the past month, I believe, Simon. Let me just round up by asking you, how much interest is there from Asia on investing in this region? Because there's been a big focus on attracting FDI. Yeah, there really has. I've been there twice in the last three weeks, mainland China and a trip to Hong Kong last week. It's a very different kind of conversations that I find myself now having with corporates and financial institutions in China and in Hong Kong who are looking for growth markets. The Gulf really stands out, you're increasingly familiar with the Gulf economy as well and Gulf markets. So in terms of portfolio flows and FDI flows, for sure, there are gains coming through.

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