Dubai: The UAE economy will sustain strong economic growth in 2016 despite the strong economic headwinds from a prolonged slump in oil prices, according to Institute of International Finance, a global association of leading financial institutions.
“We expect overall growth to moderate from an estimated 3.5 per cent in 2015 to 3 per cent in 2016 due to a smaller contribution to growth from oil production. Non-hydrocarbon growth is expected to remain relatively strong at 3.3 per cent, as a pickup in private growth offsets the drag from the decline in public spending,” said Dr Garbis Iradian, chef economist, Middle East and Africa, IIF.
Public — private partnerships
The Purchasing Managers’ Index (PMI) data for the last two months have shown some improvement in confidence. According to the IIF estimates, beyond 2016, overall growth may recover to 3.5 per cent as the drag from cutbacks in public spending comes to an end.
“In late 2015, the authorities in Dubai enacted a new law on public — private partnerships, which will permit greater private sector funding to be used for infrastructure projects. The UAE will benefit from an influx of investment from Iran, as well as the opportunity for Dubai to act as a gateway for business into Iran following the recent lifting of economic sanctions,” said Iradian.
Fiscal consolidation
The government of the UAE has moved quite aggressively to protect fiscal balances from the oil price drop. Consolidated government spending (federal government, Abu Dhabi, Dubai and Sharjah) was cut by 10 per cent in real terms in 2015 compared to an average annual increase of 9.5 per cent in 2001-2014, and further significant cuts are envisaged for this year.
Public investment has borne the brunt of the fiscal consolidation. Low-priority projects have been cancelled, fuel prices were deregulated in August 2015, electricity subsidies have been reduced, and the wage bill has been contained.
These measures and mobilisation of additional nonoil revenues have reduced the UAE’s fiscal break even oil price to $62/bbl in 2016, from $80/bbl in 2014. But the sharp fall in oil revenues has more than offset the cut in spending, particularly in Abu Dhabi, and the fiscal balance shifted from a surplus of 5 per cent of GDP in 2014 to a deficit of 4 per cent in 2015, “We expect the deficit to widen to 7 per cent of GDP in 2016 under the assumption of an average oil price of $40/bbl,” said Iradian.
Low-rate VAT
So far, most of the budget deficit has been financed by the domestic banking system as reflected in the significant increase in net claims on the government. Additional measures are available to bolster the fiscal position if oil prices remain low beyond 2016, including gradually reducing social benefits; introducing a low-rate VAT in early 2018; broadening the corporate income tax with lower rates; and privatising a range of public sector assets.
The sizeable fiscal consolidation efforts should put the fiscal stance on a more sustainable footing in the medium term provided that oil prices recover gradually to about $60/bbl by 2025, as assumed in our baseline scenario. Our projections show that the consolidated fiscal deficit (including investment income) would narrow steadily and balance by 2020.
