Dubai: The UAE’s non-oil economic growth remains strong despite the sharp fall in global oil prices from the second half of this year according to economic forecast by two leading banks such as Abu Dhabi Commercial Bank (ADCB) and Emirates NBD.
“The UAE’s economic outlook remains compelling, in both a Middle East and North Africa and emerging market context, despite the sharp fall in the oil price from mid-2014. Our view remains that the non-oil economy is in the process of a cyclical upswing marked by broad-based growth,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
ADCB has forecast the real non-oil GDP above 5 per cent in 2015 and 2016. The progress of key investment projects will be a particularly important driver of real growth and is expected further spur private consumption and external growth with population growth and the expansion of economic capacity.
Although weaker oil prices are expected dampen the fiscal and current account forecasts for 2015, economists see the overall growth to remain robust. “In the UAE’s case, the 2015 budget would run a surplus of 3.1 per cent of GDP even with a 3 per cent growth in total spending next year. Even if oil prices averaged $80 per barrel in 2015 (approximately where they are today), the UAE’s budget would run a small surplus of around 0.5 per cent of GDP,” said Khatija Haque, Head of MENA Research at Emirates NBD.
Economists say the overall fiscal strength of the UAE will buffer it from lower oil revenues. “Abu Dhabi’s strong fundamentals with low budget-break even oil price, large foreign exchange reserves and low debt levels allow for counter-cyclical spending and the ability to attract funding,” said Malik.
Meanwhile, ample liquidity in the banking sector and global sukuk market, as well as wider capital inflows, is supporting Dubai’s investment programme. Dubai has been a key beneficiary of the ample global liquidity environment, which we see as remaining supportive.
Dubai’s strong growth outlook and its measures to raise revenue and improve debt sustainability are seen positive for its ability to attract funding. Balancing existing debt with rising funding needs for its investment programme will remain critical for Dubai going forward.
Analysts see limited risks to the UAE’s investment plans from the recent fall in oil prices or from any further potential downside. “We believe that a sustained medium-term fall in the oil price below $55-60 per barrel would lead to some peripheral projects being re-examined, with core projects continuing largely unaffected. There would also likely be a greater impact on both domestic and external sentiment,” Malik said.
ADCB has forecast that the UAE’s real non-oil GDP growth will accelerate to 5.6 per cent in 2014 and remain within the 5 to 6 per cent range during the 2014-2016 period. This is up from the average of 4.3 per cent realised between 2011 and 2013. The bank sees potential for stronger growth after 2016 due to the pace of investment increasing as Dubai gets closer to Expo 2020; the output capacity of the economy increasing; and the expected strengthening of the global outlook.
Inflation
Consumer inflation has accelerated in 2014 with the pickup in economic activity, albeit remaining relatively contained at 3.1 per cent in October 2014. “Looking ahead, the stabilisation in residential real estate prices in the UAE since Q2 suggests that inflationary pressure in the housing component should moderate in 2015. As housing is the biggest component of the CPI at just under 40 per cent this should go some way towards offsetting demand-driven services inflation. A strong dollar should also help to limit imported inflation,” said Emirates NBD’s Haque.
Overall economists do not expect a return of the same inflationary pressure seen during the 2005-2008 period. We expect a stronger dollar outlook as the US Federal Reserve starts to normalise monetary policy; and a weak global inflation outlook. Moreover, the strong dollar will partially help to maintain the UAE’s international purchasing power amid a backdrop of lower oil prices,” said Malik.
