Dubai: Economic performance is likely to improve in 2018 with firming oil prices, an improvement in global trade and the expected easing pace of fiscal adjustment, according to the latest assessment of the UAE economy by Institute of International Finance (IIF), a global association of banks and financial institutions.

The country experienced a deceleration in overall growth (0.8 per cent) like its GCC (Gulf Cooperation Council) peers in 2017 due to oil production cuts under the extended Opec (Organisation of the Petroleum Exporting Countries) agreement and fiscal consolidation in Abu Dhabi.

“We expect nonhydrocarbon real GDP growth to pick up from 2 per cent in 2017 to 2.7 per cent in 2018. The introduction of the VAT [value-added tax] at 5 per cent in January 2018 and the modest increase in import prices could raise average CPI inflation from 2 per cent in 2017 to 3.6 per cent in 2018,” said Garbis Iradian, Chief Economist, Mena of the IIF.

The IIF, though optimistic on UAE’s growth, has projected a relatively conservative growth rate compared to the latest IMF projections of 3.4 per cent real GDP growth for 2018.

The country experienced subdued CPI inflation in 2017 due to a significant decline in rents, which has more than offset higher import prices. Property prices are estimated to have declined in Abu Dhabi and Dubai by 15-20 per cent from their peaks in 2014.

The IIF analysts said the UAE, particularly Abu Dhabi, can afford a more gradual pace of fiscal adjustment to reduce the impact of lower oil prices on economic growth. “We expect the fiscal consolidation in Abu Dhabi to ease this year, while Dubai’s fiscal stance remains expansionary,” said Iradian.

The consolidated fiscal account (including investment income) of the UAE is expected to shift to a small surplus of 0.4 per cent of GDP, as the partial recovery in oil prices and the additional nonhydrocarbon revenues (largely related to the VAT) will more than offset the increase in public spending.

Healthy financial sector

The UAE Central Bank Data on credit growth released in December showed weak credit demand in 2017. Gross loans fell 0.9 per cent month-on-month in December, resulting in an annual growth of just 1.7 per cent. Annual growth in deposits remained strong at 4.1 per cent in December 2017.

The UAE Central Bank’s latest credit sentiment survey showed a marginal increase in business loans, mainly attributable to the strengthening in demand in Dubai. On the other hand, demand for personal loans in aggregate was flat, with most respondents reporting no change. In terms of outlook, demand for both personal and business lending was expected to increase only on modest scales. Lower loan growth combined with lower loan demand are expected to keep the banking sector highly liquid. The loans to deposit ratio declined to 97.1 per cent in December 2017, as compared to 99.6 per cent in December 2016. According to the IIF data, the liquid assets ratio has increased from 16.2 per cent in 2016 to 18.2 per cent in 2017. Banks remain adequately capitalised with 17.4 per cent Tier 1 ratio at end-2017, nonperforming loans to total loans have declined in recent years to 5.2 per cent. Net interest margins improved since the beginning of this year as loans reset at higher rates and funding costs improved as liquidity conditions eased.

Factbox: Positive outlook for GCC

For the GCC as a whole, the IIF expects overall real GDP (gross domestic product) to shift from a contraction of 0.2 per cent in 2017 to a growth of 2 per cent in 2018, supported by the partial recovery in oil prices and government stimulus, particularly in Saudi Arabia. Domestic demand should strengthen with improved private sector confidence. The fiscal deficits are expected to narrow. The fiscal situations in Saudi Arabia and the UAE are seen on firmer footing.

— B.D.A.