United Arab Emirates Defence and Security Report Q2 2009

The coming year will be a difficult one economically for the UAE. We have revised down our growth forecasts once again on the back of a worsening export sector, weakness in the construction market, job losses and increased investor caution. It is possible that the country could fall into recession - defined as two consecutive quarters of negative growth - during the year, but this will be difficult to assess given the lack of quarterly data provided by the central bank. Overall, we believe that real GDP will grow by 1.0% in 2009, rising to a healthier 3.4% in 2010. Much of the worst news will come out of Dubai; this is the Emirate that is most closely integrated with the global economy and the one that has experienced the most rapid growth in recent years. Abu Dhabi has greater natural wealth thanks to its oil reserves, but economic weakness in Dubai will undoubtedly have some feed-through effects across all Emirates.

With the conflict in Gaza dominating headlines around the world, governments in the Middle East have been quick to condemn Israel's military action and call for an immediate halt to the hostilities. The UAE is no exception, but while it has been quick to offer political support and economic aid to the embattled territory, we do not expect any fundamental change in Emirati diplomacy. Unlike neighbouring Qatar, which has played an active role in conflict resolution in recent years, the UAE tends to take a back seat in regional affairs. This is largely a sign of the UAE's pragmatism - it is a long-time ally of the US, and is thought to have extensive economic dealings with Israeli businesses, despite the government's official refusal to normalise relations with Israel. As a grouping of Sunni monarchies, the UAE is hardly a natural supporter of Hamas, yet it retains economic ties with Iran (in spite of US pressure to expel Iranian businesses).

The UAE maintains a brisk arms trade, underpinned by regional insecurity, a large budget and a willingness to spend on military hardware. Although its armed forces are small, they are technologically sophisticated and the country rivals the regional dominance of Saudi Arabia and Iran. Procurement remains a high agenda item for the armed forces in the UAE. Continued strong economic growth, bolstered by soaring oil prices, as well as continued activity in the commercial, shipping, property, financial and tourist sectors in Dubai, mean that defence budgets will continue to be robust. Deficit spending, on the rise in the Emirates in recent years, also indicates that defence procurements will not suffer from a downturn in the local economy. Regional tensions fuelled by an ongoing US presence in the Gulf, and uncertainties in both Iraq and Iran, will also stimulate brisk arms trade in the UAE in the medium-term. Most recently, in March 2009, the UAE announced some AED18.4bn (US$5bn) worth of contracts at the ninth IDEX defence exhibition in Abu Dhabi.

On the whole, the security situation remains stable for the country. Its armed forces are a significant deterrent to aggression and it enjoys the support of numerous allies, including those in the Gulf Cooperation Council (GCC) security guarantee, the US, UK, France and Germany. In recent developments, Australian Prime Minister Kevin Rudd has also visited the United Arab Emirates. In December 2008 he met with the Crown Prince, Sheikh Mohammed bin Zayed al-Nahyan, and held a separate meeting with the Vice-President, Sheikh Mohammed bin Rashid al-Maktoum. These talks focused on expanding the two countries’ security relationships and both governments expressed interest in building ties in defense and counterterrorism.

We anticipate that the United Arab Emirates will continue to increase its defence spending. Our projection is that this will likely grow at around 5% annually, in real terms, over the coming years. These increases will depend, however, on whether the economy can ride out the global financial crisis and downturn in oil prices.