Country Report United Arab Emirates June 2008

Outlook for 2008-09

• The domestic political environment and outlook are stable and the president, Sheikh Khalifa bin Zayed al-Nahyan, will maintain the UAE's relatively liberal social and economic policies, as well as its pro-Western foreign policy stance.
• If international tensions related to Iran's development of a nuclear capability were to worsen, the UAE would find it increasingly hard to balance its extensive commercial interests in Iran with its strong political ties to the US.
• Efforts to increase the participation of UAE nationals in the labour force will continue to be a government priority in 2008-09.
• Export earnings are expected to increase by 34% to US$210bn in 2008, owing to higher oil prices. This, together with sustained expansion in the non-oil economy, will support strong real GDP growth of 8.3% in 2008.
• The authorities remain committed to the current exchange-rate regime, despite high inflation and a weak US dollar throughout the outlook period and the obligation to adopt a pro-cyclical interest-rate policy.
• The fiscal position will remain healthy, and the trade and current accounts will continue to record large surpluses, in spite of rapid import growth.

Monthly review

• The UK has raised its assessment of the risk of a terrorist attack in the UAE to high, the same level as Saudi Arabia and greater than other Gulf countries.
• The UAE has pledged to reopen its embassy in Iraq, closed since a kidnapping in 2006, following a breakthrough visit to Baghdad by the foreign minister. A UAE developer, Damac, has separately announced investment plans in Iraq.
• The US treasury secretary, Henry Paulson, has urged sovereign wealth funds in the Gulf to invest in the US.
• Expectations of an upward revaluation in the UAE's currency have reduced, as demonstrated by the lower premium on the dirham in forward markets.
• Thorium Power of the US has revealed that it has been hired by the Abu Dhabi government to prepare two reports laying the groundwork for a UAE nuclear energy programme to meet growing electricity demand.
• A high and accelerating rate of growth in money supply and nominal domestic credit indicate that inflation may be even higher in 2008 than in 2007, especially given strong housing demand and rising global commodity prices.

Source: Country Report