The framework for sustainability-linked funding is slotting into place for the UAE. The one major contributor will be from increased non-oil trade. Image Credit: Shutterstock

In the recovery from Covid, high oil prices meant the UAE and the wider Gulf region stayed relatively protected against tighter global financial conditions.

However, the world economy’s inexorable shift to a lower carbon future means that over the medium term, structural reforms will be needed to ensure the economy keeps growing. This means further trade integration, foreign direct investment (FDI) and more investment in energy diversification will be needed to allow a smooth transition to reach the goals of UAE Net Zero 2050 – the drive to net-zero emissions by the middle of this century.

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Despite this challenge, the UAE and the other members of the GCC have already made significant progress. Last year, Dubai was the registered home to 40 hedge funds, a third of which were set up in the previous 12 months. This has been spurred on by both the post-Covid regulatory framework encouraging firms to increase their foreign investment, and the region’s ability to smooth the onboarding process.

Another sign of the GCC’s growing influence was the hosting of the world's leading decision-making event on climate issues, COP28. The UAE and Gulf states are working to advance the technology and investment needed to facilitate the clean energy transition.

Oman has over $50 billion in renewable energy, notably green hydrogen, and Qatar, as well as funding a multi-billion-dollar clean energy joint venture with the UK’s Rolls-Royce, is planning the development of world’s largest blue ammonia facility, a future alternative to LNG.

In the labour market, the Saudi private sector workforce has grown, reaching 2.6 million in 2023 with female employment more than doubling from 17.4 per cent in 2017 to 36 per cent in early 2023.

Together, this progress could add up to a tipping point that sees larger scale foreign investment in the GCC region. To secure this prize, the UAE and its peers need to keep up their reform momentum. Currently, hydrocarbon revenues account for some 60 per cent of UAE fiscal revenues, while oil exports represent 15 per cent of total exports.

Green investments

The UAE is investing heavily to ‘greenify’ its oil industry as well as developing a green building code. In a recent report, the International Monetary Fund wrote of the UAE: “Recent efforts to expand non-hydrocarbon revenue and promote sustainable finance will also help reduce fiscal reliance on hydrocarbons over time, while the build-up of green investments under the reform program will mitigate longer-term vulnerabilities to climate change and deliver substantial economic gains.”

Should the world accelerate the pace towards decarbonization, the UAE would face lower fiscal revenues, lower exports and a potential deterioration in asset quality linked to carbon-intensive activities in local banks.

To avoid such an outcome, the authorities can implement policies to enhance trade and implement reforms to boost FDI. In this regard, the implementation of Comprehensive Economic Partnership Agreements (CEPAs) should boost trade and integration in global value chains and further attract FDI.

These initiatives should allow the UAE to gain competitiveness and to further develop new industries, notably in services.

The CEPA payoffs

Opportunities in sectors such as aviation, environment, hospitality, logistics, building and construction, financial services, and digital trade have already been identified through the signing of CEPAs. These developments are crucial to wean the UAE economy off fossil fuel exports. Sectors like manufacturing, logistics and hospitality have also been identified as medium-term development opportunities.

The transition from a high carbon-based economy is a major challenge facing the UAE economy, as well as multiple geopolitical issues that show no sign of abating. If a global recession arrives that would lead to lower oil demand and could increase the scale of the task as oil revenues would decline.

What does this signal for asset allocation?

Country selection is vital for investors to avoid the victims of geopolitical turbulence, those with too much leverage, those disregarding ESG criteria, or those missing out on new technologies. That means backing individual countries, or companies within them, rather than simply looking at Asia or Europe, for example, as blocs.

In the case of the UAE, it puts the onus to smooth the transition to achieving net zero emissions by 2050.