UAE buffers shield economy from regional shocks

The UAE economy has withstood disruption from the Middle East conflict, supported by strong financial reserves, rapid policy intervention and continued strength across banking, trade and logistics, the International Monetary Fund has said.

An IMF staff team completed a visit to Abu Dhabi and Dubai from July 7 to 16, holding discussions on economic conditions, financial-sector performance and policy priorities. The meetings also prepared the ground for the UAE’s 2026 Article IV consultation, the fund’s broader assessment of the country’s economy.

The mission found that sound economic fundamentals, ample policy buffers and advanced institutional preparedness had contained the overall impact of the geopolitical shock. Measures introduced by the authorities helped preserve financial stability, protect essential supply chains and provide targeted assistance to affected businesses and households.

Khaled Mohamed Balama, Governor of the Central Bank of the UAE and Governor for the UAE at the IMF, said the consultations had strengthened communication and enabled officials to exchange views on economic and financial developments.

“These consultations provide an important platform for strengthening our existing cooperation with the IMF and exchanging views on the latest developments and future priorities,” Balama said.

He added that the authorities remained committed to monetary and financial stability while improving the financial system’s ability to respond to regional and global changes. The discussions involved 35 federal and local entities coordinated by the central bank.

The assessment comes as intermittent restrictions around the Strait of Hormuz weigh on shipping, trade and energy exports. Uncertainty surrounding the duration and intensity of the conflict remains high, creating risks for tourism, aviation, transport, property and other non-oil sectors.

Overall economic output is expected to be slightly lower in 2026 after strong expansion during 2025. Non-hydrocarbon growth has slowed as uncertainty affects travel, commerce, transport and real estate activity.

Economic momentum could improve during the second half of the year if tensions between the United States and Iran ease gradually. Oil exports are expected to recover, while higher production could support hydrocarbon growth and offset part of the disruption caused by regional instability.

The IMF expects a stronger rebound in 2027 as oil production expands and non-oil activity strengthens. Tourism and trade flows are also expected to normalise, though the outlook remains highly dependent on security conditions and the restoration of dependable shipping routes.

Inflation is forecast to rise during 2026 as higher global energy and food prices pass through to businesses and consumers. Price pressures are expected to ease over the medium term, helped by domestic supply arrangements, subsidies and the dirham’s peg to the US dollar.

The country’s fiscal balance is expected to remain in surplus, supported by higher oil revenue, conservative budgeting and measures to improve spending efficiency. Low government debt gives policymakers room to provide further assistance if the conflict becomes more severe or prolonged.

Public and government-related companies entered the disruption with strong balance sheets, helping preserve confidence and reduce pressure on the wider economy. International reserves also remain at levels considered sufficient to provide comfortable import coverage.

The external balance is likely to remain in surplus, although it may narrow during 2026 because of weaker non-oil trade and disrupted energy shipments. A recovery is expected as trade routes stabilise and crude exports increase.

Banks remain well capitalised and liquid, with capital buffers above regulatory requirements. Deposits and lending have continued to expand, although private-sector credit growth may moderate alongside softer non-oil activity.

The central bank’s Proactive Financial Institution Resilience Package, introduced in mid-March, has helped financial institutions maintain operations and deliver services during the disruption. The programme was designed to strengthen preparedness, support liquidity and safeguard the continuity of the financial system.

Property activity moderated during the first half of 2026 after several years of rapid expansion. Performance has varied by location and market segment, while prices have generally remained at or above their 2025 levels. Banks’ exposure to real estate remains contained, but changing market conditions require continued supervision.