DUBAI — The slowdown in non-oil sectors of the UAE (Aa2 stable) economy will remain protracted over the next few years, which will weigh on revenue growth in Dubai and Sharjah (A3 negative), Moody’s Investors Service said last Nov. 28.

Particularly for Dubai, lower growth conditions and counter-cyclical fiscal policy measures are aggravating already high debt levels. By contrast, Abu Dhabi (Aa2 stable) is well insulated from these pressures because of the revenue it derives from hydrocarbons and international investment income from its sovereign wealth fund assets.

Non-oil economic activity is likely to remain below historical rates across the UAE over the next few years. Dubai's real GDP growth slowed to its lowest rate since 2010, while Abu Dhabi's non-oil real GDP growth decelerated to 0.6%. We expect the slowdown to be protracted due to the soft labour market, structural constraints in the UAE's tourism and shipping sectors and wage deflation, which is likely to feed through to house prices and retail trade.

Slower growth is affecting government revenues more acutely in Dubai and Sharjah. Dubai and Sharjah – which do not generate significant hydrocarbon revenues – have revenue bases which are more tightly correlated to macroeconomic conditions due to their heavier reliance on government fees, fines and (to a lesser extent) tax revenues on consumption, imports and foreign banks. In contrast, Abu Dhabi's non-oil revenues (excluding investment income) accounted for only 10% of total revenues in 2018, with hydrocarbon proceeds and foreign investment income from ADIA comprising the vast majority of revenues, providing a much higher degree of insulation from the economic cycle (albeit with a higher sensitivity to oil price volatility).

» For Dubai in particular, lower growth and counter-cyclical fiscal policy are aggravating already elevated debt levels. Despite a more cautious fiscal policy stance since the 2008 debt crisis, Dubai's debt burden has continued to rise, and we estimate it will reach 62.5% of GDP by the end of the year, from 55.7% in 2016, increasing the risk that the government's capacity to support government-related entities will be increasingly constrained. Furthermore, if existing revenue sources continue to underperform, the government may opt to upstream income from government-related entities.

Non-oil economic activity is likely to remain below historical levels across the UAE.

Compared with its GCC peers, the UAE economy is relatively diversified and many of its non-oil sectors export services – like transport and tourism – rather than visible goods. In fact, travel, transport and other services exports have accounted for a greater share of export revenue (ex. re-exports) than hydrocarbons since the oil price shock. Up until 2015, these sectors grew strongly, with Abu Dhabi's non- oil GDP growing 6.5% and Dubai's by 4.0% in 2011-15.

However, growth has stalled since the oil shock and the associated regional austerity measures, cooling from 6.4% in 2014 to 1.3% in 2018. Dubai's real GDP growth1 slowed to 1.9% in 2018, the lowest rate since 2010, while Abu Dhabi's non-oil real GDP growth declined to 0.6%. Growth momentum shows little signs of improving: Abu Dhabi's non-oil real GVA contracted by 0.9% year-on- year in the first quarter of 2019, while non-oil real GVA for the UAE grew by just 0.3% in the same period. Dubai released data for the first half of 2019 which showed the economy was growing by 2.1%, marking a slight acceleration from the 2018 rate of 1.94% but still significantly below the 4% average growth experienced between 2011 and 2015. — SG