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Accueil / Portraits et entretiens / Entretiens

Interview with Dr. Robert Mogielnicki – The UAE within a shifting landscape: building strategies for multiple challenges

Par Michel Makinsky, Robert Mogielnicki
Publié le 02/07/2020 • modifié le 02/07/2020 • Durée de lecture : 10 minutes

Dr. Robert Mogielnicki

The COVID-19 pandemic seems to be reaching critical levels in Saudi Arabia and Iraq, leading to increased levels of safety measures. In comparison, what is your assessment of this virus situation in the UAE? What are the main data, decisions and achievements? In light of these, do you feel that the situation is under control? Is the situation improving or is there a more concerning trend?

UAE officials want to convey the sense that there is a clear, consistent approach to reopening their economies. Struggling local companies are desperate for stability – not only in their finances but also in expectations surrounding future operations. The UAE has combated the spread of COVID-19 amongst residents by following a three-pronged approach: early restrictions on movement, expansive testing, and close monitoring of infections through various digital platforms. This led to early progress in curbing the spread of COVID-19.

An easing of public health-related restrictions at the end of Ramadan resulted in a spike of infections – an outcome experienced in other countries in the region and across the globe. The combination of a relatively small population, substantial financial resources, and strong state capacity will ultimately enable the UAE to monitor and contain the spread of the virus. Although emirate-level governments sometimes disagree over policy, much of the country seems to be on board with the need to expand testing and closely monitor the spread of the novel coronavirus.

Can you describe the cumulative economic impact of both COVID-19 and changes in oil prices on the UAE’s economy? Are there specific concerns?

It is too early to assess the full impact of the coronavirus outbreak and the oil price rout in early 2020 on the UAE’s economy. Federal bodies, emirate-level governments, and various commercial entities have offered a range of stimulus and support packages to businesses and individuals affected by the coronavirus outbreak. Much of this support takes the form of deferrals, waivers, exemptions, and preferential financing options. Such measures can delay redundancies, bankruptcies, and closures for a time – but not indefinitely. Gaining a clearer picture of the extent of financial and commercial damage depends on the length of the government intervention and associated willingness to inject capital into the economy, as well as how the coronavirus outbreak unfolds.

The effects of the global coronavirus outbreak and energy market outlook are increasingly visible in the UAE’s labor market, where expatriates offer a steady supply of cheap labor and help drive demand for domestic consumption. Estimates suggest that Dubai’s population might contract by 10% over 2020, following an outflow of expatriates. Low-cost, expatriate laborers are integral to the profitability and competitiveness of many private sector firms in the UAE. Higher-skilled expatriates operate across healthcare, consulting, media, and other service-oriented industries. Moreover, high-net-worth expatriates serve as key investors, business owners, and consumers across the region. In this manner, expatriates play an integral part in the domestic recycling of capital that helps sustain Gulf economies.

State-led service provision to residents and foreign visitors plays a crucial role in generating government revenues, especially in emirates with smaller or non-existent proven reserves of oil and gas resources. The relative success of the UAE’s economic diversification agenda hinges largely on the economic activities surrounding expatriate residents and foreign visitors. A substantial and sustained exodus of expatriates would represent a historic shift in Gulf labor markets – a shock that regional economies are simply not prepared to absorb at the moment.

Can you isolate specific concerns related to the COVID-19 pandemic, which would require durable policy changes beyond short-term measures?

On the economic policy front, Emirati officials must address emerging vulnerabilities associated with the sectoral composition of the country’s economy and a dependence on service provision for raising government revenues. Industries directly facilitating the physical movement of people and goods play an outsized role in the emirates, especially those outside of Abu Dhabi. The aviation sector in Dubai, for example, accounts for around 30% of the emirate’s gross domestic product. Therefore, there is an urgent need to further diversify the status quo of economic diversification beyond a handful of closely intertwined industries.

State-led service provision to residents and the imposition of government fees may no longer be as lucrative as before, placing additional pressures on federal- and emirate-level financial resources. Global economic conditions may reduce the supply of expatriates in the country, while the coronavirus outbreak is likely to dampen consumer demand and change consumer behavior. Thus, policymakers must carefully consider sustainable approaches to generating non-oil government revenues in the future.

The UAE rolled out value-added tax (VAT) and excise taxes in 2018. This was a step in the right direction, but the relatively low tax rate of the VAT and narrow scope of excise taxes limit the total tax revenues. Indeed, prominent businesspeople in the country have appealed to the government to reduce the standard VAT rate. Many small- and medium-sized businesses also complain about significant up-front costs and commercial fees. A slow transition to a more progressive tax and fee structure in the country may enable economic policymakers to provide better support to (and ultimately generate revenue from) those companies most likely to succeed.

The UAE is already engaged in significant diversification in order to increase non-oil sector production and exports. What are the main successes, shortcomings and priorities? How have these been amended following the recent crises?

The general structure of Gulf Arab economies and regional trajectories of economic diversification will complicate government efforts to rebound from the extraordinary and interrelated crises that emerged in early 2020. Economic diversification away from hydrocarbon revenue remains an ongoing, expensive process across the Gulf region. The UAE’s economy does appear more diversified than that of its Gulf Arab neighbors. However, this is partly a result of the relative scarcity of hydrocarbon resources in many of the emirates, which have little choice but to focus on non-oil industries. At the same time, the health of oil and gas markets indirectly impacts the growth of the country’s non-oil economy.

The high-priority, non-oil industries earmarked for diversification efforts rely heavily on the transnational flow of international visitors and physical goods. Like the oil industry, these segments of the UAE’s economy have experienced abrupt shocks and offer little hope for a swift economic rebound. Many industries considered pillars of economic diversification – including tourism and hospitality, aviation, and logistics – confront unprecedented challenges. I predict [1] that digital industries and other forms of remote service provision are likely to become central features of Gulf economic diversification plans once crisis management measures subside and longer-term economic planning resumes.

Beyond short-term decisions, do you identify or foresee specific issues requiring deep changes in economic orientations?

Addressing imbalances in the UAE’s real estate sector will remain a challenge for the country’s policymakers. An oversupply of residential and commercial real estate already existed prior to the emergence of the coronavirus outbreak in early 2020. A potential decrease in the expatriate population, changing consumer behavior, and new working habits threaten to place further strain on the real estate sector. A “build it and they will come” approach is clearly not going to work any longer.

The emirate of Dubai, in particular, has sought to better coordinate real estate development initiatives in recent years. Government officials launched new committees tasked with reforming property regulations and creating more accountability around development projects. Planners for Expo 2020 in Dubai – now delayed until 2021 – aim to repurpose many of the buildings for the World Fair event as mixed-use communities. UAE officials can limit future growth in the supply of residential and commercial real estate; however, stimulating demand for the existing properties will prove much more problematic in the coming months and years.

Are the current oil and gas reserves sufficient to keep the economy afloat, especially as there are still some uncertainties about future oil prices and demand?

The UAE’s substantial sovereign wealth, foreign exchange reserves, and relatively small population of citizens make the country better prepared than many of its Gulf Arab neighbors to weather the current economic crises. Though no boon for the economy, the current oil prices of around $40 per barrel are manageable over the short term. The UAE had an external breakeven oil price of $31 and a fiscal breakeven oil price of $67 in 2019, according to the International Monetary Fund. A combination of smart budget cuts, utilization of financial buffers, debt issuances, and strategic sales of state assets will help the UAE emerge from this difficult period in better shape than many of its neighbors.

Regarding the UAE’s behavior and position within OPEC, are the UAE’s expectations on future production levels and prices likely to materialize? If not, can we expect policy changes?

It is in the UAE’s interest to help maintain stability in oil markets and capitalize on a gradual increase in oil prices as economies around the world gradually open up and business operations resume. The UAE’s interests in global oil markets are largely aligned with those of Saudi Arabia, and we are likely to see the Emiratis push OPEC+ producers with spotty compliance records to adhere to their commitments. Some forecasts suggest that the oil price rout of early 2020 placed OPEC+ producers in a solid position to increase their share of the global oil market over the coming years – a reason for very cautious optimism. The UAE, however, needs be careful to preserve its commercial reputation with Asian buyers, which now must contend with uncertain prices and lower volumes of oil from OPEC+ producers.

What is your assessment of the UAE’s boycott on Qatar on the UAE’s economy and role as a logistics hub? 

Prior to the imposition of the Saudi-led boycott on Qatar in 2014, Qatari supply chains were heavily dependent upon commercial and logistics hubs in the UAE. Moreover, many multinational firms engaged with Qatari markets through regional headquarters and offices in the UAE. The ongoing boycott forced Qatari officials to refocus attention on the domestic capabilities of its trade and transport hubs. Qatar also solidified [2] strategic, bilateral relations – such as that with Turkey – that had been in the making for a number of years. These steps may have increased the self-sufficiency of Qatar’s economy, but it has come at a cost. The boycott disconnects Qatar from the some of the Middle East and North Africa’s largest economies and poses additional challenges related to key industries, such as aviation. As for the impact on the UAE, the boycott on Qatar probably contributed to ongoing issues within the country’s real estate sector, which was already suffering from a glut of residential property. Despite their small numbers, Qataris also tended to be profligate spenders in the UAE’s retail, tourism, and hospitality industries. Although both countries have mitigated the negative economic impacts from this disruption in the bilateral relationship, an eventual return to the free flow of people, services, and goods between the two countries would be beneficial for both economies.

The UAE are compliant with US sanctions and more or less in line with pressures from the Americans. What is the current status of this relationship? Have you noticed an improvement of trade relations with Iran recently?

There is a substantial Iranian population in the UAE, and many UAE-based traders continue to trade with Iran. In some instances, this economic exchange has put local firms at risk of secondary sanctions, especially when sensitive economic sectors are involved. The U.S. Department of the Treasury’s Office of Foreign Assets Control designated five UAE-based companies as facilitating the Iranian regime’s petroleum and petrochemical sales in March 2020. The pressure of U.S. sanctions on Iran makes it more difficult for Iranian firms to receive onshore and free zone licenses in the UAE, and therefore commercial entities in Dubai and the northern emirates, in particular, have certainly lost commercial opportunities in this respect.

While the Trump administration’s “maximum pressure” campaign against Iran reflects a renewed form of economic and diplomatic pressure, the existence of sanctions on Iranian entities and individuals is not a new development. Over the past several years, the UAE has sought to reduce its economic exposure to Iran as a hedge against the possibility of renewed U.S. sanctions on the Islamic Republic. As a result, new or expanded sanctions on Iran will not make or break the overall health of the UAE’s economy.

Can we see specific foreign actors such as China gaining ground in the UAE’s economy?

In a prior publication [3] for the Arab Gulf States Institute in Washington, I argued that the UAE has emerged as China’s primary economic partner in the region. Indeed, some of China’s largest banks had a presence in UAE financial centers prior to the launch of the Belt and Road Initiative (BRI). The BRI and its related projects, though, permitted the UAE to credibly position itself as an integral commercial link between Asia and African and European markets. China’s leading role in developing 5G technologies and other technological capabilities has enabled the Asian powerhouse to further embed itself in the UAE’s telecommunications infrastructure and digital networks, as well as those of other Gulf Arab markets.

The coronavirus outbreak and related public health measures create new opportunities for Chinese firms to engage with healthcare and education technologies in the UAE. A joint venture between Chinese and Emirati firms was responsible for building COVID-19 testing facilities in the UAE, and a Chinese state-owned vaccine developer secured regulatory approval to test its coronavirus shots in the UAE. The UAE’s young citizenry is experimenting with increasingly-available Chinese payment platforms, such as WeChat Pay, and digital media services from ByteDance and Tencent. Meanwhile, the global economic downturn and the acute fiscal shocks experienced have likewise renewed privatization agendas in Gulf Arab countries. Chinese firms are investing in Gulf renewable energy [4] and other forms of critical infrastructure, such as power and electricity facilities.

Recent crises do not affect all members of the federation in the same manner. Can you broadly describe their comparative strengths and weaknesses? Is this likely to change or will the current balance of power between members be reinforced? How so?

I do not believe that a reconfiguration in the balance of power between the UAE’s emirates is on the horizon. Abu Dhabi’s position as the capital emirate and vast sovereign wealth holdings will ensure that it remains the key powerbroker within the country. Of course, the uncertain trajectory of energy markets will influence the ability and willingness of Abu Dhabi’s government to stimulate its local economy and provide financial support to the remaining emirates. Dubai will continue to chart a somewhat independent economic course and incorporate innovative, cutting-edge economic activities into its development strategy. However, the emirate may require financial assistance from Abu Dhabi for acute economic needs, such as managing maturing debt or supporting key industries. Any support of this nature will likely be forthcoming, especially as the country approaches the new 2021 date for Expo 2020. The world fair will take place in Dubai, but the broader country stands to benefit from the high-profile event. The northern emirates will continue to rely on financial support determined by Abu Dhabi and seek new ways to capitalize on their geographic proximity to Dubai, depending on how economic conditions unfold over the short and medium terms.

When looking at the domestic landscape, do you expect risks of political and social tensions following recent developments?

The likelihood of political tensions in the UAE arising from the current economic crises is very low. Citizens in the UAE enjoy strong social safety nets, and the federal- and emirate-level governments possess adequate fiscal and bureaucratic capabilities to address the immediate concerns of the citizenry. Unlike the protests that emerged across the Middle East and North Africa in 2011, the social and economic repercussions of the coronavirus outbreak (and to a lesser degree the oil price rout) are keenly felt in countries across the globe. Socioeconomic concerns related to the Gulf’s labor market have become more visible in recent months. Frustrations have been (somewhat unfairly) directed largely toward expatriate residents rather than regional governments. These labor market challenges are more acute in neighboring Gulf Arab countries, like Saudi Arabia and Oman, where initiatives to reduce the supply of expatriates in each country have been ongoing for the past couple of years.

Publié le 02/07/2020


Outre une carrière juridique de 30 ans dans l’industrie, Michel Makinsky est chercheur associé à l’Institut de Prospective et de Sécurité en Europe (IPSE), collaborateur scientifique auprès de l’université de Liège (Belgique) et directeur général de la société AGEROMYS international (société de conseils sur l’Iran et le Moyen-Orient). Il conduit depuis plus de 15 ans des recherches sur l’Iran (politique, économie, stratégie) et sa région, après avoir étudié pendant 10 ans la stratégie soviétique.
Il a publié de nombreux articles et études dans les revues Défense Nationale, Stratégique, Cahiers d’Etudes sur la Méditerranée Orientale et le Monde Turco-Iranien (CEMOTI), Maghreb-Machrek, Politique Etrangère, Outre-Terre, Eurorient, Cahiers de l’Orient, MERIA, Revue Diplomatique…
Il a dirigé deux ouvrages collectifs : « L’Iran et les Grands Acteurs Régionaux et Globaux », (L’Harmattan, 2012) et « L’Economie réelle de l’Iran » (L’Harmattan, 2014) et a rédigé des chapitres d’ouvrages collectifs sur l’Iran, la rente pétrolière, la politique française à l’égard de l’Iran, les entreprises et les sanctions. Membre du groupe d’experts sur le Moyen-Orient Gulf 2000 (Université de Columbia), il est consulté par les entreprises comme par les administrations françaises sur les sanctions, les mécanismes d’échanges commerciaux et financiers avec l’Iran et sa région. Il intervient régulièrement dans les media écrits et audio visuels (L’Opinion, Le Figaro, France 24….).


Dr. Robert Mogielnicki is a resident scholar at the Arab Gulf States Institute in Washington. He manages the long-term research series “Next Gen Gulf,” which explores how advanced technologies shape Gulf Arab governments and economies. His published work and commentary have appeared in Foreign Policy, The Banker, Axios, Bloomberg, The Washington Post, Forbes, HuffPost, Cairo Review of Global Affairs, and the LSE Middle East Centre. He holds a D.Phil from the University of Oxford’s Magdalen College.


 


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