United Arab Emirates sector performance

July 2021

Sectors at a glance

Industry performance outlook

Automotive and Transport

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Chemicals and Pharma

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Construction and Construction Materials

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Consumer Durables

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Electronics and ICT

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Financial Services

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Food

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Machines and Engineering

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Metals and Steel

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Services

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Textiles

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Automotive and Transport

Remains Poor Due to the economic downturn, domestic sales of vehicles decreased 35% year-on-year in 2020, with another 7% sales contraction in Q1 of 2021. This has led to increased credit risk for the car retail segment. The transport segment has been impacted by lockdown measures and decreased demand for logistics, with the airline segment severely hit. After a 23% contraction in 2020, transport value added is expected to rebound only 6% in 2021, with a comprehensive recovery expected in 2022 at the earliest.

Chemicals and Pharmaceuticals

Remains Fair Until recently, chemicals and pharmaceuticals businesses have shown acceptable business financials. However, the deteriorating demand from key buyer sectors has had a negative impact on chemicals performance. Payment performance of businesses in the plastic and related segments remains poor, while the payment performance of pharmaceutical businesses is better, given increased demand for medicines and medical products due to the pandemic. Pharmaceutical value added is forecast to increase by more than 6% in 2021, after growing 2.2% in 2020.

Construction and Construction Materials

Remains Poor

The recovery of the property market, which is still struggling with overcapacity, remains rather uncertain. The UAE construction industry was already performing poorly before the coronavirus outbreak, as modest economic growth over the past couple of years prevented higher spending on building projects. This already led to increased cash difficulties and tight margins for construction businesses, especially for smaller players. In 2020 construction businesses were adversely impacted by the reduction in government spending, low capital expenditure from corporates and decreased demand for housing. Construction output in the UAE is currently expected to increase by about 4.5% this year, after contracting 4.2% in 2021.

Consumer Durables

Remains Poor

The domestic consumer durables market remains characterised by high competition (online and offline), single-digit margins, low entry barriers, high indebtedness of businesses and prudent bank support with loans. In 2020 consumption of non-food consumer goods decreased due to comprehensive lockdown measures (e.g. temporary closure of shopping malls and commercial centres), and the fact that about 5% of the population (approximately 500,000 mainly expatriate workers) left the country due to pandemic. The level of non-payment notifications and credit insurance claims in the non-food retail sector increased in H2 of 2020 compared to H1.

Retail value added is expected to rebound only 0.5% in 2021 after an 8.2% contraction in 2020. For the time being, payment delays and protracted defaults continue to remain elevated due to the slow recovery, businesses┬┤ cash flow problems, fierce competition and reluctant support from banks.

Electronics and ICT

Remians Fair The ICT market in general is characterised by stiff competition, low and declining margins, low entry barriers and a lack of support from banks. However, the industry has been an indirect beneficiary of the coronavirus pandemic. Large ICT companies with good market shares are expected to record robust growth rates in 2021, as a result of the demand for more digital connectivity, higher cloud based activity and increased investments by companies and individuals in IT hardware and software products. The sector is expected to do relatively well in 2021, with value added to increase by about 4%. However, caution is advised when dealing with ICT traders and companies which do not have a long history of operations, as we there have been many run away cases in this sector in the past.

Financial Services

Remains Fair Despite sizeable liquidity injection by the Central Bank and the relaxation of regulations, banks have remained rather reluctant to transmit those measures to the market, with lending conditions remaining tight. Profitability challenges in a low-interest rate environment could be a reason for this. At the same time, non-performing loans have increased due to increased financial troubles for businesses and consumers alike. Asset quality could weaken further with the expiry of loan repayment deferral schemes, and the exposure of banks to the sluggish property sector is particularly high (at 20% of total credit). However, banks should be sufficiently resilient to cope with those challenges, as the financial sector remains liquid and well capitalized. Additionally, banks have increased provisioning in anticipation of a further deterioration in asset quality.

Food

Remains Poor In 2020 sales were negatively impacted by lockdown measures, a decreasing population (approximately 500 thousand people, mainly expatriate workers, have left the country due to pandemic), declined consumer confidence and less demand from still struggling hotels and restaurants. Competition appears to have intensified in this segment as customer base has reduced and supply remains at an elevated level. As a result, payment defaults have increased in this segment.

Machines/Engineering

Remains Poor In 2020 the business business performance worsened due to decreasing orders on hand, which resulted from the economic downturn. It remains to be seen if domestic demand from key buyer sectors like construction and oil and gas will rebound.

Metals and Steel

Remains Poor In 2019 the metals industry already showed a subdued performance, with lower demand from key sectors like construction, along with rising pressure on margins. In 2020 the situation has further worsened, due to the severe economic downturn triggered by the coronavirus pandemic. Reduced demand from both local and offshore re-export business impacted metal and steel providers. While in 2021 a rebound has started, with metals value added estimated to increase by about 11%, this only partly compensates the sharp 22.5% contraction seen in 2020.

Services

Remains Poor Due to the comprehensive lockdown measures and the decline in the number of international tourists, many service businesses suffered heavily in 2020, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. Especially in Dubai service sectors have been severely affected by the massive deterioration in tourism inflow. Many hotels, private tourist related businesses and restaurants have closed, while establishments which have reopened are still running below optimal utilization levels. This has led to stress on the financial performance, and both payment delays and insolvencies increased sharply in 2020.

Currently hotel and catering value added is forecast to rebound by about 15% in 2021, after a whopping 38.6% contraction in 2020. A full recovery of the important tourism industry (accounting for 16% of GDP) will still take some time. The World Expo in Dubai, planned to take place from October 2021 to March 2022, could help revive the sector. However, this depends largely on the pace of the global vaccination rollout and subsequent lifting of travel restrictions.

Textiles

Remains Poor Wholesalers and retailers have been negatively affected by changes in customer behaviour and increased competition from new online retailers. Their performance has further deteriorated due to low sales during the lockdowns and subdued consumer sentiment. Clothing value added decreased by 10% in 2020.

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