Covid-19 has caused significant damage to economies around the world since the start of the year.
This has had a much more profound impact on the GCC nations, stemming from lower oil prices and government led restrictions to tackle the pandemic. Central Banks and governments have realised the seriousness of the problem, and have accordingly announced unprecedented stimulus measures in addition to the loosening of monetary policies.
These measures might have helped in restoring confidence, but the extent of the disruption in business activities remains challenging to business continuity and sustainability plans, demanding accommodative measures by private sector companies. Most notably, the UAE is witnessing a bigger challenge as the pandemic has significantly impacted private sector activity, which is now struggling to remain solvent due to contraction in revenues and a drop in operating cash-flows. Hence, it will be imperative for the UAE government to take bold decisions to attract capital and businesses such as family offices to accelerate the recovery process and consolidate its positon within the region.
The UAE has already rolled out several stimulus packages aimed at supporting businesses, and optimising spending, thus demonstrating overall support to the economy. Consistent with their vision to increase the contribution of SMEs to the economy and support priority sectors, Covid-19 recovery measures have been aimed at driving job retention, retaining expats and boost demand across sectors.
Apart from previous reforms such as SME allocation of government contracts, freezing fees, relaxing foreign ownership restrictions to boost FDI, and PR schemes granting long-term visas for expat investors and entrepreneurs, fresh stimulus packages have been focused on the retail, external trade, tourism, and the energy sectors. For instance Dubai’s 15 new initiatives comprise of nine within the commercial and business sector – four for the tourism sector, and two focused on reducing the cost of living and doing business for citizens, expat residents and the business community. Similarly, Abu Dhabi’s fresh 15 initiatives have focused on supporting SMEs and easing the availability of loans to domestic companies.
As outlined, the UAE authorities’ dedicated focus to stimulate its economy will prove crucial in expediting recovery from the pandemic. Although the current state of affairs may have presented a setback, the government must continue to focus on achieving long-term sustainability and diversification strategy in order to wane its reliance on the hydrocarbon sector and other externalities.
Amid the pandemic, authorities have already rolled out several schemes that entail tax benefits, incentives, and filing extensions for the business community, such as the Dubai Multi Commodities Centre’s (DMCC) business support package for its 17,000 members, along with incentives for new registrations, and 80 per cent fee reductions for companies already in the process of registering at DMCC. In addition to these measures, the government must continue to attract foreign talent, on which it has already begun work with the implementation of the new long-term residence visas in 2019 that entitles foreigners to live, work and study in the UAE without requiring a national sponsor, coupled with reforms such as 100 per cent business ownership in the Emirates. Further measures could include subsidies for foreign businesses to set up base in the country, attractive FDI schemes, and extensive expatriate incentive programs.
Another sector that could strongly benefit from government reform is the UAE’s real estate sector. The pandemic has stressed a new setback for real estate developers as longer operating cycles and weak economic activity has affected demand for newly built properties. However, analysts noted a price stabilisation pre-crisis across Dubai, which sustained during the pandemic, suggesting strong future prospects for the UAE real estate sector. The government has already announced relief measures via suspension of real estate registration fees until the end of this year, while the Central Bank has reduced the capital that banks require to hold for their SME loans by 15-25 per cent.
The Central Bank is further set to increase the Loan-to-value (LTV) ratios applicable to mortgage loans for first-time home buyers, and must now continue to encourage investment in the local property market through innovative and preferential mortgage solutions. The country could look towards introducing policies such as the interest-only mortgage plans in Europe and the US, and the formation of government-sponsored entities akin to Saudi Arabia’s PIF-backed Saudi Real Estate Refinance Company (SRC), which could boost the secondary mortgage market, thus reducing borrowers’ exposure to rising global interest rates and building a strong case for affordable housing in the UAE without a surge in intrinsic risks.
The UAE government must also focus on establishing/developing adjacencies around the priority sectors, which could utilize the existing infrastructure of priority sectors to generate additional revenue streams. For instance, the growing popularity of the gaming and entertainment industry covering theme parks, retail centres, sporting hubs, media & films, etc. presents a strong case for further development, especially given its crucial contribution to the UAE’s hospitality sector over the past decade. Going forward, the introduction of casinos, which are relatively non-existent due to the restrictive regional regulations, could well complement growth within this industry. This remains particularly important for the UAE, given the high economic value derived from its tourist inflows.
Lastly and arguably the most important case may be addressing the UAE’s largest obstacle to the path of recovery, i.e. the disruption to its businesses. To overturn the current pessimistic business climate, the government should look at the underlying opportunity to change the character of its economy. This could be the most opportunistic time for the government to stimulate the growth of SMEs and family-owned businesses, stirring demand both locally as well as from overseas. This could be expedited via focused reforms encompassing various tax incentives, subsidies, and benefits to facilitate smooth transition of such companies into the country. This could be further complemented by granting long term residency visa or permanent residency based on investment criteria, which will be an extended advantage of relocating to the UAE. Broadening of such measures could be an important factor in boosting consumption, especially when everyone is expecting demand to remain subdued for a prolonged period.
Given the level of uncertainty and damage to the domestic economy, it is imperative that the UAE government quickly introduces such measures to accelerate economic recovery. Moreover, with the pandemic resetting the world economy to a new normal, the UAE government must take strides to adapt to this new reality and change the way it conduct business to emerge stronger and bolder from the pandemic. Hence, the UAE government should continue to draw inspiration from peer countries and not shy away from out-of-the-box thinking and bold decision making to achieve long term sustainable growth.