Dubai: The UAE economy is expected to weather the turbulence from low oil prices that resulted in decline in government revenues and budget deficits, according to Bank of America Merrill Lynch (BofAML).

“We continue to think that the UAE is headed for a soft landing, with a less pronounced cycle than in 2008. Challenges and downside risks are likely to increase if oil prices remain low. Macro buffers including adequate banking sector capital and liquidity, lower exposure to foreign bank funding, and lower build-up of debt and real estate-related leverage are likely to mitigate vulnerabilities, in our view,” said Jean-Michel Saliba an economist with BofAML.

BofAML’s assessment follows a recent report from Institute of International Finance (IIF) that said the UAE economy will sustain strong economic growth in 2016 despite the economic headwinds from prolonged slump in oil prices.

“We expect overall growth to moderate from an estimated 3.5 per cent in 2015 to 3 per cent in 2016 due to a smaller contribution to growth from oil production. Non-hydrocarbon growth is expected to remain relatively strong at 3.3 per cent, as a pickup in private growth offsets the drag from the decline in public spending,” said Dr. Garbis Iradian, chief economist, Middle East and North Africa, IIF.

The UAE, particularly Dubai, is expected to benefit from the Iran deal, but low oil prices are likely to dampen the impact of the deal on Iranian domestic demand. Expo 2020 capex could also support activity, particularly if Abu Dhabi provides or backs financing facilities to minimise foreign borrowing. Expo 2020-related borrowings are expected in 2018 and 2019.

BofAML analysts expect Dubai’s 2016 announced budget to be optimistic on the fiscal revenue side in the context of slower economic activity that is likely to drive slower growth in government-fee income receipts.

“We still think Dubai Inc. will manage to roll over debt in 2016, although this will likely become increasingly challenging. Nakheel is likely to be supported, if needed. Abu Dhabi support is likely to remain the ultimate sovereign backstop on systemic issues, in our view,” said Saliba.


Bond issues

Analysts anticipate a significant sovereign bond issuance pipeline this year and expect all Gulf Cooperation Council (GCC) countries to become large and regular external issuers over the next two-three years. While this should pressure spreads to adjust, the better risk appetite may allow soaking up the bond supply overhang in the near-term.

Abu Dhabi is expected to tap the bond market with an external bond issuance and is likely to be a regular issuer over the next two-three years. Abu Dhabi’s government expenditures continue to be rationalised and have dropped versus the 2014 peak. This has so far taken place principally through a reduction in subsidies and cutbacks in domestic loans and equity investments.

UAE authorities have confirmed completing the first phase of studies on the imposition of company taxation. “This confirms our view that UAE authorities are among the most proactive in the GCC on restoring fiscal sustainability,” said Saliba.