For the UAE, 2025 will not be a repeat of the 2008 crisis

02/05/2025 02:32 AST

The 2008 global financial crisis (GFC) left deep scars on the world economy. The UAE economy contracted by five per cent in 2009, oil prices collapsed, stock markets swooned, real estate prices plunged, infrastructure projects stalled, and trade and tourism were disrupted.

Could something similar happen in 2025? With turmoil in global financial markets, catalysed once again by events unfolding in America, it may seem natural to worry that the UAE economy is about to enter a period of suffering. After all, cataclysmic policy moves by the United States could disrupt the global trading system, unleashing unpredictable forces, putting a deeply interconnected UAE economy in harm's way.

So, is 2025 shaping up to be like 2008? Well, no.

Undoubtedly, a major disruption in international trade and finance will adversely impact the UAE. However, despite indicators that might otherwise suggest more exposure to global risks, the reality is that the UAE today is in a much stronger position to weather external shocks. Of course, this is no time for complacency. Policymakers must remain vigilant and ensure robust contingency plans are in place to deal with a potential economic contagion.

At first blush, the UAE appears vulnerable to external shocks. Trade as a share of the economy is 200 per cent, much higher than the 150 per cent in 2008. Net foreign direct investment (FDI) inflows are six per cent of GDP, compared to only 1.6 per cent in 2008. FDI outflows too are high at 4.3 per cent of GDP, marginally lower than the five per cent in 2008. Travel and tourism receipts are 10-11 per cent of GDP, compared just 2.2 per cent in 2008.

Were it not for the ongoing disruption caused by US trade tariffs, we might marvel at how significantly the UAE has deepened its openness to trade, finance, and people. But with greater openness comes the risk of vulnerability to external shocks. If trade, investment, and tourism now constitute an even larger share of the economy than during the GFC, isn't the UAE more exposed to global volatility? Here we turn to the lessons of the GFC experience and how UAE policymakers have made the economy much more resilient.

Once a crisis hits, a credible and timely policy response is critical. That is exactly what happened when the GFC contagion attacked the three main drivers of the UAE's growth - oil, trade and logistics, and real estate. The government took prompt action to stabilise the banking sector by providing emergency liquidity facilities, guaranteeing bank deposits, and strengthening the banking system. To counteract reduced real estate activity, the government stepped up infrastructure spending, especially in Abu Dhabi. In addition to stabilising the banking sector, the government extended support to key national banks and GREs. The UAE Central Bank slashed interest rates and the government set up a multi-billion Dubai Financial Support Fund. Importantly, a coordination committee comprising ministers and the Central Bank officials monitored vulnerabilities and coordinated policies.

In the aftermath of that crisis, the government embarked on a years-long process to strengthen the economy's resilience. There was a concerted effort to diversify the economy with the result that the non-oil GDP now accounts for three-quarters of the economy. There has also been an attempt to diversify international partnerships for trade and investment. For example, in 2008, just eight countries accounted for half of the UAE's imports. By 2022, the number had almost doubled. Trade and investment ties with Asia and Africa have also deepened, reducing overdependence on legacy partners.

On the regulatory side, a new bankruptcy law was enacted in 2016 to ensure orderly resolution of setbacks in business. New real estate regulations improved consumer protection and helped further diversify the economy. To ensure stronger public finances, a value added tax and a corporate income tax were introduced in recent years. This is in addition to buffers built through sovereign wealth fund investments. There is now much greater federal-emirates level coordination, which is critical for crisis management. There is also greater transparency, as evidenced by the UAE's removal from the grey list of the Financial Action Task Force (FATF) in 2024.

To preserve these gains, policymakers will have to maintain vigilance as trade tensions escalate and financial markets grow more uncertain. This is an opportune time to assess any vulnerabilities in key sectors that a global contagion could exploit. Despite warnings of recessions in both the United States and China growing more frequent, we are not in a full blown crisis yet. There is still time for the world's leaders to step back from the precipice. But the world's biggest powers are not exactly consulting the rest of the world as they approach the brink. It would be prudent for the rest of the world to prepare for the worst.

The two biggest economies, accounting for almost half of global GDP, could end up in crisis. If that happens, oil, trade, investment, finance, travel and much else will hurt. In that sense, 2025 feels scarier than 2008. However, the UAE is in a stronger position than it was in 2008. That is a silver lining around the dark clouds rising in the distance.

The writer, an economist and author, is a former World Bank officer. He currently serves as an Adjunct Professor at the Anwar Gargash Diplomatic Academy in Abu Dhabi. His book Unshackling India (HarperCollins, 2021) was named one of the Best New Books in Economics for 2022 by the Financial Times.

Khaleej Times