Oil windfall fuels faster growth in UAE

The steady rise in oil prices in the first five months of this year and significantly higher average oil prices last year, than what was predicted, have prompted analysts to forecast that the UAE and some of its Gulf neighbours are headed towards another oil-led economic boom.

Oil prices (the reference price for the Organisation of Petroleum Exporting Countries or Opec) rose to an average of $123 (Dh452.39) per barrel in March, the highest monthly average since July 2008, mainly owing to geopolitical tensions.

Analysts say, for the UAE, which has a relatively high budget break-even oil price (in the range of $95 to $107), the high oil export earnings should come as a big incentive to increase its fiscal outlay.

“In the UAE, higher oil prices should provide authorities with additional comfort to push ahead with recently approved infrastructure projects and spending,” said Khatija Haque, senior economist at Emirates NBD.

Higher than forecast oil prices are certain to boost accumulated fiscal reserves, providing a bigger cushion against any future negative oil price shocks. Furthermore, to the extent that governments repatriate oil revenues, domestic banking systems should continue to benefit from improved liquidity.

Economists say the UAE is on a strong footing, with Dubai seeing robust performance in its core non-oil sectors, with trade, tourism and retail benefiting from regional dynamics, while Abu Dhabi is benefiting from elevated oil prices and high crude output.

“We are revising up 2012 [gross domestic product] growth forecasts for the UAE to 3.4 per cent. The main reason for this is Abu Dhabi’s desire to increase expenditure on key infrastructure projects. We now expect its economy to grow by 3.2 per cent [versus our earlier forecast of 3 per cent] in 2012.

“We have also revised Dubai’s growth to 2.9 per cent from 2.4 per cent,” said Shady Shaher, an economist at Standard Chartered.

Economists at Bank of America Merrill Lynch, HSBC and Citibank said recently that the GCC as a bloc is a net bene-ficiary of the surge in crude prices.

Although, like its Gulf neighbours, the UAE is a key beneficiary of high oil prices, analysts feel that the direct impact on UAE’s economic growth will be largely dependent on the willingness of governments and sovereign wealth funds to invest in domestic economies.

Despite the prolonged run of high oil prices, the International Monetary Fund (IMF) has been modest in its growth outlook for the UAE this year. While the IMF has revised down its growth forecast for 2012 from 3.8 per cent to 2.3 per cent, Emirates NBD, the largest bank in the country estimates the UAE’s GDP growth for the year at 2.5 per cent.

There has been a build-up in expectations that another oil boom is around the corner, in the light of significant growth in fiscal and current account surpluses. However, the key economic indicators have yet to reflect this view.

For example, the UAE’s purchasing managers’ index (PMI) remained steady in the first quarter of this year and private sector activity has expanded only marginally.

“By definition, the large and growing fiscal and current account surpluses we expect the major oil producers to accrue this year and next represent increases in savings, not gains in consumption, investment or domestic demand. To make their impact felt directly, the oil earnings have to enter the domestic economy, most obviously by being spent by the state,” said Simon Williams, HSBC’s chief economist for the Middle East and North Africa.

The feed-through from oil earnings to spending is not direct and/or immediate. Historically, there has been a strong correlation between oil prices and the spending plans of the UAE and other GCC states.

However, in the UAE, there is even less evidence of feed-through, with governments continuing to place their surpluses overseas under the management of the sovereign wealth funds.

Even if there is going to be a lag between high oil revenues and actual government spending, economists say the oil-funded build-up of foreign assets will clearly enhance the UAE’s capacity to fund future spending plans and hedge against any external shocks.