Dubai: The UAE’s economic growth which faced strong headwinds following prolonged low oil prices and slump in international trade are seen bottoming out this year for a turnaround from 2018, according to recent economic forecasts.
According to Bank of America Merrill Lynch the UAE has managed a soft landing, with a less pronounced cycle than in 2008. “We expect non-oil real GDP growth to have bottomed out as the fiscal drag eases and infrastructure activity picks up,” said Jean Michel-Saliba, MENA Economist of Bank of America Merrill Lynch.
The latest projections in the International Monetary Fund’s (IMF) World Economic Outlook report released last month agree. According to the IMF, real GDP (gross domestic product) growth in the UAE is forecast to slow down to 1.5 per cent in 2017 from 2.7 per cent last year and recover sharply to 4.4 per cent in 2018.
BofA Merrill Lynch has slightly more conservative forecasts. “We expect overall UAE real GDP growth of 0.9 per cent in 2017, from 2.2 per cent likely in 2016. The headline figure masks a likely contraction in the oil sector due to the Opec deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017, from 2.3 per cent in 2016,” Saliba said.
Over the medium-term, he expects non-oil growth to increase to 3-3.5 per cent on the back of greater Expo 2020 projects.
After averaging 10 per cent annual growth from 2000 to 2010 and a slump in 2009, Dubai real GDP growth was 4.1 per cent in 2015, but slowed to 2.5 per cent in the first nine months of last year. Growth remains broad-based although the construction sector is the laggard. The fastest growing sectors are restaurants and hotels, electricity, gas & water, transport and real estate.
In Abu Dhabi, fiscal consolidation has slowed down non-oil real GDP growth, but BofA Merrill Lynch expects the drag to fade. Abu Dhabi’s real GDP grew by 2.8 per cent in 2016, from 5 per cent in 2015. Non-oil real GDP growth slowed to just 2.8 per cent in 2016, from 8.6 per cent in 2014.
The Dubai government is projected to record a small budget surplus in 2016, but the fiscal balance is likely to shift to a modest deficit of 1 to 2 per cent of GDP s from 2017 onwards as capex associated with the new airport, new metro lines and Expo 2020 come online.
The Dubai 2017 budget projects a deficit of $0.6 billion (Dh2.2 billion) or 0.6 per cent of GDP. Given the higher budgeted spending levels, delivering on fiscal revenue targets will be essential as any slowdown in economic activity is likely to drive slower growth in government fee income receipts. This could lead to wider deficits and greater external borrowing.
The Abu Dhabi government could record a fiscal surplus this year at oil prices around $50/bbl. The 2017 budget does not include the impact of Opec-mandated cuts but is based on an oil price assumption of $50/bbl (versus $40/bbl in 2016).
Over the next five years to 2022, authorities are planning to anchor spending at a flat level of Dh250 billion and target revenues increasing through the passage of a value added tax, crude oil production increases (as ADNOC targets capacity at 4.0mn bpd by 2022) and oil stabilising at $50/bbl.
Expenditures in Abu Dhabi have been 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.
BOX — Credit quality improving
Dubai: Abu Dhabi is not expected to return to international debt markets over the coming years, but analysts expect an improvement in the UAE credit quality. “Over time, we expect greater market differentiation for Abu Dhabi versus other GCC credits as its high-grade high-quality value is cemented. Scarcity value, the ability to post budget surpluses at $50/bbl and the lack of external issuance going forward should support and tighten spreads,” said Jean Michel-Saliba, MENA Economist of Bank of America Merrill Lynch.
The supportive external financing backdrop and improved domestic liquidity are expected to support refinancing of Dubai government-related entities (GREs). Aggregate Dubai public sector debt appears to have stabilised in nominal terms, although it remains at elevated levels, according to Bank of America Merrill Lynch.