Dubai: The UAE government’s consistent effort to stabilise the country’s public finance through combination of fiscal consolidation efforts ranging from spending cuts, rationalisation of publicly funded projects, subsidy reforms and efforts to diversify government revenues are resulting in tangible improvements in government finances according to economists.
“We forecast that the UAE’s consolidated budget deficit will remain contained, narrowing to 2.9 per cent of GDP in 2017. We forecast a further reduction in the fiscal deficit in 2018 given the introduction of VAT [value added tax] next January,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
The UAE is expected to raise revenue of about 1.6 per cent of GDP in the first year following VAT implementation. In addition, the introduction of excise duties on some goods are also expected to add to government revenues. The government will introduce an excise tax on a few unhealthy products from 1 October 2017. The UAE is looking to levy a tax of 100 per cent on tobacco products and energy drinks and 50 per cent on carbonated drinks, excluding sparkling water. Official estimates suggest that the boost to government revenue from this tax will be small at Dh7 billion — equivalent to about 0.5 per cent of 2017 GDP for a full year of implementation.
Overall, the fiscal deficit is expected narrow consistently over the current year and the next. The narrower deficit highlights the UAE’s stronger fiscal position within the GCC (and versus other oil exporters), its fiscal discipline, and the front-loading of reforms following the collapse of the oil price. Analysts estimate that the country’s consolidated fiscal position could be close to being balanced in 2019.
Government expenditure
The small deficit allows for a slower pace of fiscal adjustment in the outlook period. “The narrowing of the fiscal deficit that we forecast comes despite a likely moderate rise in total government expenditure. Nevertheless, expenditure levels will remain weak, with total estimated expenditure for 2017 still below the level seen in 2015,” said Malik.
Spending growth is expected to be a modest 1.6 per cent in 2017 and 2.8 per cent in 2018. These increases will likely be driven by higher capital expenditure in Dubai supporting the investment programme. Dubai’s 2017 budget implies a 27 per cent increase in capital expenditure, excluding the spending plans of a number of government entities that are also expected in increase investment spending. With the rising trend among contractors to secure funding for projects themselves (often from export credit agencies), there may be a longer delay before investment expenditure is realised and reflected in the budget.
The rising investment activity in the UAE should have a relatively contained impact on government debt, as much of the capex is being driven by the private sector. According to the International Monetary Fund (IMF) estimates Dubai’s debt (government and GRE debts together) remains high at about 111.5 per cent of GDP in mid-2017, although has been falling in absolute terms and as a percentage of GDP.
Refinancing deals
Analysts day Dubai’s short-to medium-term debt payment schedule looks manageable, with maturity dates extended as part of a number of restructuring and refinancing deals. There is a marked spike in government debt maturing in 2018, which is linked to borrowing from Abu Dhabi and the Central Bank of the UAE. This includes: a $10 billion (Dh36.7 billion), five-year loan by the Abu Dhabi government through two banks; and a $10 billion in bonds that Dubai issued to the UAE Central Bank.
“We expect these loans to be rolled over again, as was the case in March 2014, when the interest rate was also reduced to 1 per cent from 4 per cent,” said Malik.
The IMF estimates that Dubai’s government debt will rise in absolute terms but will moderate as a percentage of GDP. Total UAE government debt remains low at 19.3 per cent of GDP in 2016, according to IMF data.
