Dubai: A plunge in oil prices since mid-2014, coupled with slower economic growth, have dragged down Dubai’s main bourse index and liquidity in the UAE’s stocks markets, which till today are still seeing much lower average trade values.

And the UAE’s economy is expected to continue facing challenges in the second half of this year, though economic activity is likely to accelerate from 2019, analysts said.

Factors such as the implementation of value-added tax (VAT) at the beginning of this year have hit domestic consumer spending, while the recent strength in the US dollar is reducing the external competitiveness of the UAE’s economy, especially its tourism sector.

“We see a number of economic challenges remaining in 2018. The introduction of VAT at the start of the year, tightening monetary policy, and higher fuel prices are headwinds to private sector activity — corporate and household,” a June economic report from Abu Dhabi Commercial Bank (ADCB) said.

And these challenges have rippled their way into the UAE’s stock markets where trade values over the past two years have more than halved amid a liquidity squeeze.

Saleem Khokhar, head of equities at First Abu Dhabi Bank’s asset management group, attributed tighter liquidity largely to the weakness in oil prices, which began in mid-2014, squeezing government revenues. He pointed that rising interest rates in the UAE have also investor costs when it comes to accessing to funds.

“Consumers in the UAE have been reluctant to spend. We’ve seen that with the wider economy being a little bit slower, so that definitely has been an element,” he said.

Lower government spending

“Of course, there’s a link with the government spending, and we had seen the governments both in Dubai and Abu Dhabi cutting back significantly, but now there’s a reversal of that and we’re seeing some stimulus packages come in, so that’s having a positive effect.”

In 2016, the UAE Cabinet set the federal government’s budget for the year at Dh48.58 billion, slightly lower than the Dh49 billion set for the year before. The federal budget for 2017 was raised slightly to Dh48.7 billion, still in contrast to the usual annual increases in the budget.

And it’s not just stock markets where liquidity has tightened.

Household spending is also lower this year as inflation rates rise following the implementation of VAT and as thousands of jobs are axed across different industries.

According to the ADCB report, credit card spending on consumer goods fell around 5 per cent year-on-year in the first quarter of 2018. The figures are based on data from Network International and the bank’s own calculations,

Credit card spending on travel and hospitality also fell, leading to a slower growth rate in the consumer spending index, which rose around 7 per cent in the first quarter of 2018 compared to a nearly 12 per cent rise in the first quarter of 2017.

Other key macroeconomic indicators registered a decline, too. Foreign direct investment (FDI) is forecast to reach $10.9 billion (Dh40.03 billion) in 2018, a 4.8 per cent increase over $10.4 billion a year earlier. But that’s a 4.8 per cent growth rate this year, compared to an 8 per cent year-on-year increase in 2017 and a 9 per cent rise in 2016.

The UAE’s real estate market, one of the key contributors to gross domestic product, offers another look at the economy’s performance.

Sales volumes and prices have been on the decline for over two years, as have rental rates. In the first quarter of 2018, apartment rents in Dubai fell 6.5 per cent year-on-year while villa rents plunged 10.2 per cent, according to JLL, which said the rates of decline is higher than those recorded previously.

Pickup in 2019

“I think for this year, it will still remain challenging, but the higher oil price is positive as are the stimulus packages from the government so we await to see further details of these plans. We think the higher oil price should be supportive of higher government spending,” said Monica Malik, chief economist at ADCB.

She added that she sees potential for stronger economic activity from 2019.

Last month, the government announced an economic package of Dh50 billion to boost Abu Dhabi’s growth, stimulate the tourism sector, and create new jobs. The Dubai government also announced it owns set of economic initiatives that include attracting more foreign investment, and plans to increase the number of visitors to the emirate.

First Abu Dhabi Bank’s Khokhar said he also expects to see a pickup in economic growth, pointing out that the recent stabilisation of oil prices will help the economy.

“I think towards the end of this year, we’ll hopefully start to go into a positive trajectory,” he said.