Dubai: Oil price decline has reduced the UAE’s spending power but the adverse impact will be cushioned by tapping into its strong financial buffers and diversified economic base relative to other Gulf states, the Institute of International Finance (IIF), the Washington-based association of global financial institutions said on Wednesday.

The strong growth in public spending, which averaged 15 per cent per year in 2005- 2014, is projected to moderate to about 3 per cent in 2015-16. This modest growth in spending combined with broadly flat oil production is expected to slightly raise the fiscal break even price of oil and the country’s fiscal positions is expected hit a small deficit this year.

“The UAE looks resilient to the slump in oil prices given a relatively diversified economy, excellent infrastructure; a better regulated banking system, political stability, ample foreign assets, and a culture that is more open to the outside world than other GCC countries,” said Garbis Iradian, chief economist of the Institute of International Finance.

UAE’s real GDP is estimated to have grown by 4.1 per cent in 2014, helped by robust government spending on infrastructure and a further increase in private capital inflows. FDI inflows increased for the fifth consecutive year to $14.3 billion (Dh52.5 billion) in 2014, equivalent to 3.5 per cent of GDP.

Recent economic indicators show a mixed picture for early 2015. The PMI for the first four months of the year has remained at high levels. Trade and logistics in Dubai are still performing well. Earnings reports for banks and key real estate development companies indicated continued strong growth in profits in the first quarter. Sovereign CDS [credit default swap] spreads and bond yields remain modest.

But some indicators show slower economic activity. The Credit Sentiment Survey by the Central Bank of the UAE (CBUAE) for the first quarter showed that demand for loans is moderating and credit standards for companies are tightening.

“We expect growth to edge down to 3.6 per cent in 2015. While the authorities in Abu Dhabi are being more prudent and are prioritising spending on infrastructure, the slowdown in spending should be contained,” said Iradian.

Major projects and preparations to host the World Expo 2020 should help to maintain strong growth of 4.8 per cent in Dubai this year. Abu Dhabi plans to invest over $25 billion in the next five years in offshore oilfields to boost oil production capacity to 3.5 million barrels per day (mbd) by 2018 from the current production is 2.8 mbd.

Continued growth in spending, combined with broadly flat oil production is expected to slightly raise the UAE’s fiscal break even price of oil, from $71 a barrel in 2014 to $73 a barrel in 2015. Assuming an average oil price of $60, the consolidated fiscal balance is expected to shift from a surplus of 7.1 per cent of GDP in 2014 to a deficit of 3.6 per cent in 2015.

According to IIF even if low oil prices persist for a prolonged period, the UAE authorities have a number of options to boost the fiscal position. While its strong external public reserves including the assets held by sovereign wealth funds come handy, policy options including introducing a low-rate value added tax and further reducing subsidies on water and electricity can consolidate its fiscal position.