A relatively low fiscal and external current account break-even price of oil and ample foreign assets will enable the UAE to press ahead with an estimated US$700 billion worth of infrastructure projects expected to come on stream over the next 15 years, spurring credit growth in the banking sector, the Institute of International Finance, or IIF, said.
The UAE's nominal gross domestic product, or GDP, is poised to touch US$435 billion in 2016, up from US$417 billion in 2014 and US$405 billion in 2015 under a predicted baseline oil price scenario of US$78 and US$85 per barrel respectively in 2015 and 2016, the global association of leading financial institutions said in a report.
With the economic growth set to hover between 4.8 per cent and 5.1 per cent in the next two years, the UAE will post a current account balance of US$29.9 billion and US$30.2 billion respectively in 2015 and 2016, accounting for 7.4 per cent and 6.9 per cent of the GDP.
In such a scenario, the Emirates will record a fiscal balance of 1.8 per cent and 2.8 per cent of the GDP respectively in 2015 and 2016, said Dr Garbis Iradian, Deputy Director, IIF. The coming years will also see the country's public foreign assets swelling from US$573 billion in 2014 to US$615 billion in 2015 and US$652 billion in 2016. The government debt will register an increase to 22.1 per cent and 23.3 per cent of the GDP respectively in 2015 and 2016.
"The UAE looks resilient vis-á-vis the drop in oil prices, given a relatively diversified economy, excellent infrastructure, a more transparent and better regulated banking system, political stability, and ample foreign assets. Monetary and fiscal policies are expected to remain broadly accommodative,” said the report.
The IFF said under its baseline scenario, the consolidated fiscal balance will remain in small surplus through 2016 given the UAE's relatively low break-even price of oil (fiscal breakeven price of US$74/bbl and external current account breakeven price of about US$60/bbl in 2014) and the recent sharp increase in the power and water tariffs (targeting also nationals for the first time) which will lead to lower current public spending (subsidies and transfers are projected to be reduced from 3.7 per cent of GDP in 2013 to 2.2 per cent in 2015).
The report said while real non-oil GDP growth would remain strong at 4.8 per cent in 2015 a relatively low fiscal and external current account break-even prices of oil and ample foreign assets would enable the UAE to maintain its high level of spending on infrastructure and major projects and this will support growth in credit by banks.
"About US$700 billion worth of infrastructure projects are expected to be implemented over the next 15 years. Abu Dhabi is expected to continue to make significant investment in the oil and gas industries (which represents about 20 per cent of total planned public investment). The completion of major projects (including Dubai Metro and Al Maktoum International airport in Jebel Ali) and the preparations to host the World Expo 2020 should keep growth in Dubai around five per cent in the coming years,” it said.
According to IIF, the UAE banks are amply capitalised, liquid, provisioned and with stable profits, reflecting prudent regulation by the central bank in recent years. The dollar peg is fairly secure. Unlike in 2009, there does not appear to have been any withdrawal of deposits from foreign institutions.
"Dubai, as a regional hub, is expected to benefit from the projected increase in world trade, in volume terms, as a result of lower international oil prices which will benefit the global economy, and, in particular, India and other net energy importing countries in Asia. Dubai's main vulnerability is its high debt. The debt service burden would rise in the coming years due to higher principal and rising interest payments due as interest rates in the United States gradually increase,” said the report.
For the GCC as such, the large net foreign assets of the member countries can sustain continued robust government spending, especially on infrastructure, supporting nonoil growth, the IIF said.
"The GCC countries are much better positioned to cope with a slump in oil prices today than they were in the 1980s and 1990s. But the drop in oil prices will reduce hydrocarbon export receipts from a peak of US$743 billion in 2012 to about US$410 billion in 2015, leading to weaker current account positions and substantial pressures on fiscal accounts, including a fiscal deficit of 8.9 per cent of GDP in Saudi Arabia, in the absence of adjustment. Non-oil growth is expected to moderate to 4.7 per cent in 2015 from 5.6 per cent in 2014, driven by growth in government spending, albeit at a slower pace than previous years, and strong nonoil private sector activity,” it said.
"Ample public foreign assets and low debt in most of these countries will mitigate the adverse impact of low oil prices on economic activity and allow continued robust public spending, particularly on infrastructure,” said the report.
However, in light of the strategic decision by major oil producers in Opec (particularly Saudi Arabia, the UAE and Kuwait) to discount prices rather than cut back their own output in the face of surging global supply, GCC oil production is expected to remain flat in 2015.We estimate that, on average, the fiscal breakeven oil price for GCC countries is US$82/bbl for 2014 to balance their budgets,” said the report.
Source: Khaleej Times