UAE Image Credit: File photo

Dubai: The International Monetary Fund (IMF) on Monday has forecast 1.6 per cent growth for the UAE economy in 2019 and 2.5 per cent for 2020.

While the multilateral agency has forecast non-oil GDP growth at 1.6 per cent for the current year, for the next year it expects the non-oil growth to nearly double to 3 per cent.

While the oil prices are expected to remain low in the context of slowing global demand, the overall oil GDP growth is expected to be 1.5 per cent and 1.4 per cent respectively for 2019 and 2020. All these forecasts are subject to revision during the ongoing Article IV consultations.

“The UAE has been coping well to the regional and global economic slowdown. The government has announced several measures to boost growth by reducing cost of business. Going forward, GCC countries including the UAE should have longer term fiscal plans rather than short term boost in government spending to support growth,” said Jihad Azour, the IMF’s Director of the Middle East and Central Asia Department.

Iran sanctions

Growth in the Middle East and Central Asia region is expected to be 0.9 per cent in 2019, 0.4 percentage point lower than in the April 2019, largely due to the downward forecast revision for Iran (owing to the effect of tighter US sanctions) and Saudi Arabia.

Overall GDP growth in GCC countries is projected to be 0.7 per cent in 2019, down from 2 per cent in 2018. This decline mainly reflects oil production cuts in line with Opec+ agreements. Growth in 2020 is expected to rebound to 2.5 per cent, driven by a recovery in real oil GDP growth of 1.9 per cent (compared to -1.4 per cent in 2019 and 2.5 per cent in 2018).

In the GCC, with the exception of Bahrain and Qatar, all economies are projected post slower real GDP growth compared to 2018. While Bahrain is expected to grow at 2 per cent this year compared to 1.8 per cent last year, the region’s largest economy, Saudi Arabia is projected to report a drastic slowdown in growth to 0.2 per cent compared to 2.4 per cent in 2018.

The implementation of ongoing infrastructure projects and improved credit conditions will reinforce the projected near-term recovery in growth for oil exporters. But the growth outlook is fragile given the projected downward trend in oil prices, elevated oil price volatility, and emerging fiscal vulnerabilities.

“While the overall non-oil growth is expected to strengthen in 2019 on higher government spending and confidence, oil GDP in Saudi Arabia is projected to decline against the backdrop of the extension of the Opec+ agreement and a generally weak global oil market,” said Azour.

There has been a modest recovery in private credit growth in GCC countries, partly supported by lower domestic interest rates in response to recent easing by the US Federal Reserve. Nonetheless, pressures in real estate markets persist, impacting financial and monetary conditions.

Fiscal risks

The IMF has noted that fiscal consolidation is slowing in some countries and reversing in others due largely to increased spending. However the agency said the spending effect on growth has been modest so far, partly because of the composition of spending. As a result, fiscal vulnerabilities have increased, especially compared to the pre-2014 period. Gross financing needs and public debt have moved up, while governments’ net financial positions have deteriorated. Thus, IMF expects GCC countries to be more vulnerable to a decline in oil prices, particularly those with limited fiscal buffers such as Bahrain and Oman.

“Individual countries’ fiscal space, economic conditions, and financing needs should determine the magnitude and pace of the adjustment. However, in the event of adverse shocks or if cyclical conditions warrant, countries with significant fiscal space (Kuwait, Qatar, UAE) could undertake slower fiscal consolidation,” said Azour.