Timely fiscal stimulus helps UAE limit economic contraction

Abu Dhabi: Funny how no one is talking about the "fair price for oil" any more.

Now that crude is trading well above $70 (Dh257) per barrel, the question that dominated economic conversations and news coverage in the Gulf during the first few months of the year has given way to others about the region's ability to transform.

The challenge for Gulf Cooperation Council (GCC) countries became how to free themselves from ever having to worry about that question again. For those oil-reliant economies, the first quarter dragged on amid fears crude prices would stabilise near $40 as they did for the better part of the 1990s.

Economic diversification, already a stated goal of those countries for years ahead of the global economic crisis triggered in late 2008, took on even more meaning.
 
Low oil prices, coupled with the sharp decline in trade and drying up of credit markets, forced countries such as the UAE, Saudi Arabia and Kuwait to dip into their savings to ease bank liquidity, continue infrastructure development and bailout overleveraged state firms.

In the UAE, the government introduced fiscal stimulus measures collectively reaching almost 7 per cent of GDP, among the largest in emerging markets. The stimulus is credited by economists for limiting the expected contraction in the country's growth rate for the current year.

While the International Monetary Fund (IMF) has projected a 0.2 per cent decline, UAE officials including Sultan Bin Saeed Al Mansouri, Minister of Economy, remain upbeat on the UAE's chances of achieving 1 per cent growth.

"The UAE Government has played a crucial role in getting the country's economy back on track," Hamad Bu Amim, director general of the Dubai Chamber of Commerce and Industry, said in a recent report.

"The joint efforts by the federal and local governments in meeting the obligations of various government entities have boosted the investor confidence as has the continuation of the Government fiscal stimulus packages, and lower interbank lending make the outlook for the coming year more promising as we can look forward to a prosperous trading year," he added.

Not to be overlooked, it was also government efforts that helped Dubai avert disaster when just weeks ago, Abu Dhabi extended federal funding to the extent of $10 billion (Dh36.7 billion) to help Dubai with debt restructuring beginning with Dubai World's property subsidiary Nakheel.

But as the UAE has forged ahead with its development plans, targeting a 65 per cent contribution of the non-oil sector to GDP by 2020, worries about oil prices eased going into the summer months.

Crude prices have remained above $50 per barrel since May and above $60 per barrel since mid-July. In December, 2008, prices dipped below $40 per barrel for the first time since the summer of 2004, according to the United States Department of Energy (DOE).

Most estimates now project average crude prices for 2010 above the $70 mark with DOE expecting $78 and Merrill Lynch projecting $75 per barrel, well above the breakeven point of around $55 per barrel for GCC budgets.

Oil prices aside, perhaps it is the policies adopted by the government in good times such as maintaining a tax-free system, developing basic infrastructure and creating a business-friendly environment that are now driving positive projections for recovery.

Projections for 2010 GDP growth range from 2 per cent by Merrill Lynch, to 2.4 per cent by IMF, to 3.2 per cent by the UAE Ministry of Economy. "As the GCC's most open and most leveraged economy, the UAE was badly hit by the global recession," the investment bank said in a recent research report.

"As the R-word is now ‘recovery', we believe the UAE is the best positioned country in the region to benefit from picking up global economic activity, higher oil prices, weaker [US dollar] and easing credit crunch."