The Emirati nation's national strategy calls for an investment of over 40.8 billion USD in the country's renewable energy production capacity by 2030. With a view to mitigating the risk of dependence on the exploitation of hydrocarbons, the United Arab Emirates has developed a strategy to position itself as a rising financial center, a pioneer in the development of new technologies and the exploitation of renewable energies. The aim here is to present the UAE's specific risk context, the various mitigation strategies and the long-term financial opportunities. Through the main credit indicators, the various risks specific to the region, financial regulations, diversification of investment portfolios and innovative project initiatives, as well as the long-term financial opportunities arising mainly from sustainable investment and international reach, it is possible to present, quantify and understand the financial risk intrinsic to the Emirates of Abu Dhabi and Dubai.
Table 1 compares the main sovereign risk indicators for the United Arab Emirates and Canada.
Generally speaking, the United Arab Emirates present a higher level of risk than Canada, although inflation seems to be more contained in the Middle Eastern country. Their monetary policy is modelled on that of the USA, the latter having raised its key rates in 2023. The table shows the need for sound financial risk management to maintain the country's attractiveness to international investors.
The aim here is to present the main risks to which the nation is exposed, and the context in which they are expressed.
Concentration risk
In November 2024, the capitalization of the UAE equity markets (ADX and DFM) reached $1,000 billion, surpassing that of countries such as Italy and Brazil. However, this growth is accompanied by a marked risk of concentration, particularly visible in the predominance of the Abu Dhabi market (ADX), which alone accounts for 80% of the Emirates' total market capitalization. This phenomenon is accentuated by the overwhelming weight of International Holding Company, which accounts for 30% of ADX capitalization, with 60% of its shares held by Royal Group, a conglomerate chaired by His Highness Sheikh Tahnoun bin Zayed Al Nahyan, brother of the President of the United Arab Emirates.
At the same time, the market is dominated by state-owned companies, including ADNOC and its subsidiaries, which account for almost 10% of total capitalization (ADX AND DFM combined). This high concentration around a small number of players, often linked to the state, demonstrates a lack of depth and diversification in the Emirati stock market. As a result, the markets are highly illiquid, with the number of transactions almost 300 times lower than Asian exchanges of similar size.
Market risks
Abu Dhabi and Dubai do not have the same economic profile. Accounting for less than 1% of Dubai's GDP, oil production is not one of the sectors to which the state is exposed. Wholesale and retail trade represent 25% of the region's GDP, while financial services account for 11%. Ranked as the third most-visited city in the world in 2023, with 17 million visitors, the city has seen tourism contribute 11.7% of its GDP. Real estate is another pillar of the city's economy, accounting for almost 8% of GDP in 2024. A downturn in the global economy or fluctuations in the financial markets would have an immediate impact on the emirate's economic activity.
On the other hand, the Emirate of Abu Dhabi remains highly dependent on hydrocarbon revenues, which account for almost 90% of the nation's reserves. This sector accounts for nearly 45% of the emirate's GDP and generates almost 90% of its revenues. This dependence on oil exposes Abu Dhabi to fluctuations in world energy prices and demand. A prolonged fall in oil prices, or drastic energy transition efforts that reduce demand, could have adverse effects on the emirate's economy, with consequences for the allocation of capital in its efforts to diversify its economy and industry.
Two axes have been identified concerning the financial risk mitigation strategy in the United Arab Emirates, presented in the previous section. The first stems from the regulations adopted to govern the nation's economic and financial activities. The second relates to the diversification of investment portfolios and products.
Financial regulations
In the United Arab Emirates, the regulatory framework is supported by two regulatory authorities. The Central Bank is responsible for monetary policy, banking regulation and the supervision of financial institutions. The latter is responsible for indexing the dirham to the US dollar (1 USD = 3.6725 AED), thereby reinforcing monetary stability, limiting exchange rate risk and ensuring the predictability of dollar-denominated oil revenues. On the other hand, the Securities and Commodities Authority (SCA) regulates the securities and investment sector, ensuring compliance with international standards of transparency, governance and investor protection, through the regulation of financial markets.
Secondly, the creation of free zones such as the Dubai International Financial Centre (DIFC), regulated by the Dubai Financial Services Authority (DFSA), and the Abu Dhabi Global Market (ADGM), under the authority of the Financial Services Regulatory Authority (FSRA), both regulators independent of the government body, illustrates the Emirates' commitment to providing a robust financial framework that is appealing to international investors, in line with various international standards, notably with regard to money laundering, international accounting standards and compliance with the Basel agreements.
Finally, a number of incentives have been introduced to attract international capital and talent. The introduction of the golden visa and the easing of the rules governing shareholding in companies are just two examples. Since 2020, it has been possible for a foreigner to own 100% of the capital of a company operating in the Emirates. Previously, the ceiling was 49%. Reforms of this kind have consolidated the country's attractiveness, by broadening opportunities for foreign investment.
Diversification of investment portfolios
Again with a view to mitigating financial risks, Abu Dhabi and Dubai are focusing on diversifying their investment portfolios. By 2023, the Emirates had attracted USD 16 billion in foreign direct investment from the USA, India, the UK, France and Saudi Arabia. Through this kind of investment, the nation helps direct investor capital into key sectors, including financial services, technology and innovation, tourism and hospitality. The Emirates are committed to providing simplified access to different markets, aided by a flexible regulatory framework, as outlined above.
Massive infrastructure investments further diversify the region's portfolio. The emblematic Palm Jumeirah project, an artificial archipelago, represents an investment of 12 billion USD and embodies Dubai's determination to shine as a unique international tourist and residential destination. Once the passenger terminal at Al Maktoum International Airport, costing a total of USD 34.85 billion, is completed, it will become the world's largest airport, with an annual capacity of 260 million passengers. This infrastructure strategy also extends to Abu Dhabi, where 144 projects have been approved for 2024, totalling 18 billion USD of investment in housing, education, tourism and natural resources. These will enable the region to benefit from an international reputation and contribute to its economic diversification.
Finally, investments in technological innovations can also be seen as a strategy for diversifying investment portfolios. The G42 Expansion Fund, a USD 10 billion private equity fund, a partnership between G42, an Abu Dhabi-based artificial intelligence company, and the Abu Dhabi Growth Fund, an Emirati sovereign wealth fund, is an example of a capital allocation dedicated to technological innovations in smart mobility, renewable energies, digital infrastructure, fintech and healthcare.
In addition to the elements presented above, the United Arab Emirates has identified the energy transition as a strategic sector for economic development, but also as a lever for societal transformation. As allocators of capital, the country's banks have pledged to mobilize USD 270 billion by 2030, as well as taking concrete action, such as cleaning up 14 of the world's highest peaks and the Nile River. Banks participate in 30% of green bond issues in the entire Middle East region, consolidating their position as leaders of change.
In addition, the services offered extend to sustainable investment funds (ESG ETFs), green loans, and the implementation of structuring initiatives, such as the creation of a working group aligned with the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures). This group aims to help financial institutions and investors measure, manage and disclose climate risks, thereby consolidating transparency and confidence in the Emirati market.
The effort is also being made by national companies. In 2023, Masdar launched $750 million in green bonds to finance its global projects. Today, the company has a combined capacity of 20 GW of renewable energy, with a target of 100 GW by 2030.
Finally, the UAE aims to increase the share of clean energy in the energy mix to 50% by 2050, with a budget allocation of nearly 54 billion USD by 2030. Investments will mainly be allocated to the deployment of solar projects, power plants and dams to harvest freshwater reserves.
Government and bank commitments to the energy transition represent an opportunity to position the nation as a benchmark, both in terms of diversification of the energy mix and cooperation between the various players in society.
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