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The worst is behind the UAE economy, says IIF

Non-oil activity to pick up as fiscal drag eases and consumption spending rises

Gulf News

Dubai: Following the partial recovery in oil prices, there is a sense that the worst is behind for the UAE economy and confidence is gradually returning, the Institute of International Finance (IIF), a global association of financial institutions, said in its latest update on the UAE economy.

“Sentiment has improved with firmer oil prices and an increase in Purchasing Managers Index [PMI]. We expect non-oil activity to pick up modestly in 2017 as fiscal drag eases and consumption spending rises in the second half of 2017, ahead of the introduction of value added tax [VAT] in 2018,” said Garbis Iradian, Chief Economist Africa Middle East, IIF.

The UAE economy has been resilient to the impact of the slump in oil prices as it has benefited from a relatively diversified economy, excellent infrastructure, political stability and ample foreign assets.

“After a challenging year, we expect the drag from fiscal consolidation to ease and non-hydrocarbon growth to pick up slightly to 2.9 per cent, from 2.3 per cent in 2016. The crash in oil prices has caused the Abu Dhabi government to cut spending sharply, which in turn, has had ripple effects across the UAE economy, translating to slower non-oil activity,” said Giyas Gökkent, senior economist, Africa Middle East, IIF.

“With relatively limited oil resources and oil dependence, the other emirates have not emulated Abu Dhabi, but have not been immune from negative spillovers,” he said.

Recent purchasing managers index (PMI) data show improvements from their trough in October and equity markets have staged a rebound on the back of improved sentiment, supported by firmer oil prices. “We expect activity to accelerate in the second half of 2017 as consumers increase their spending ahead of the new VAT regime,” said Iradian.

Fiscal adjustment by Abu Dhabi combined with the modest increase in oil prices will narrow the consolidated fiscal deficit from 3.3 per cent of GDP in 2016 to 1.1 per cent of GDP in 2017. Further subsidy cuts by raising electricity and water tariffs have been announced and new fees and taxes are being implemented. As a result, UAE’s fiscal break even oil, is projected to decline further to $55 per barrel in 2017, from $76 per barrel in 2014. Inflation is expected to rise modestly to 3.5 per cent in 201.

IIF economists expect consolidated government expenditures to roughly remain flat in 2017, driven by Abu Dhabi’s budget. Consolidated government revenues are expected to rise by 7 per cent in 2017, mainly due to the rise in oil prices which will improve Abu Dhabi’s fiscal balance. Abu Dhabi has also implemented noil revenue raising measures, including a 3 per cent municipal fee on rental contracts of expats which is being collected this year on a pro-rata basis from the date of contract renewal in 2016.

Additional noil revenue raising measures are planned such as the GCC-wide VAT in 2018, which is expected to yield the equivalent of 1-2 per cent of GDP in revenues and will be shared by individual emirates and the Federal government. As a result of these developments, the fiscal deficit including investment income is projected to narrow to 1.1 per cent of GDP, from 3.3 per cent in 2016. However, excluding investment income, the deficit is projected at about 6 per cent of GDP.

The key risk to growth will remain lower than expected oil prices. Challenges include spillovers from slowing neighbouring economies and real exchange rate appreciation. However, IIF economists not expect a change in the exchange rate regime, given that the peg is regarded as a critical anchor of economic stability.

Preparations for Expo 2020 and key projects will support activity in the UAE. However, Overall growth is expected to remain subdued at 1.9 per cent in 2017, due to a small contraction in oil production related to the recent Opec agreement.