Dubai: The UAE is the best managed economy in the region, according to the latest regional economic outlook report from the Institute of International Finance (IIF), a Washington based association of world’s leading banks and financial institutions.
“The UAE with large financial buffers (estimated at around $670 billion), safe-haven status, perfect infrastructure, sound banks, and diversified and business friendly economy will help the economy cope with prolonged low oil price environment,” said Garbis Iradian, MENA Chief Economist of the IIF.
The IIF noted that the UAE authorities were the first in the GCC to reform energy subsidies and liberalize fuel prices. The Emirates have also continued to improve the business environment and competitiveness. Economic performance is likely to improve in 2017 and 2018 with firming oil prices, improvement in global trade, and the expected easing pace of fiscal adjustment.
“We expect non-oil real GDP growth to accelerate to 3 per cent in 2017 and 3.5 per cent supported by investment in preparations for the EXPO 2020 and improvement in private sector sentiment with the gradual recovery un oil prices. Several high frequency economic indicators, including PMI, retail sales, and tourist arrivals over the first eight months of this year suggest improvement in private sector activity,”
The IIF expects the overall growth (oil and non-oil combined) will decelerate to 1.5 per cent in 2017 due to oil production cuts under the extended OPEC agreement. CPI inflation remained subdued despite the significant increase import prices, as rents have declined.
The introduction of the VAT at 5 per cent in early 2018 and the modest increase in global commodity prices could raise the average CPI inflation from 2.1 per cent in 2017 to 3.7 per cent in 2018.
Dubai has performed relatively well due to its diversified economy. Growth is projected at about 3 per cent in 2017. However, it has not escaped unscathed from the regional slowdown. The volume of property transactions has declined and prices have softened. Growth in Abu Dhabi is expected to be more subdued at 0.8 per cent, weighed down by oil production cuts following the recent OPEC agreement. Nonoil activity, however, is improving after a challenging two years during which deep government spending cuts slowed activity. Key projects such as the construction of nuclear plants and airport expansion are progressing, albeit with delays.
Gradual fiscal adjustment
The UAE can afford to maintain modest fiscal deficits and follow a more gradual pace of fiscal adjustment for many years, to reduce the impact of lower oil prices on economic growth.
“We expect the UAE’s consolidated fiscal deficit to narrow to 2.1 per cent of GDP in 2017, from 4.1 per cent in 2016. However, the deficit is significantly larger at 8.4 per cent of GDP if investment income on the sovereign wealth fund (SWF) is excluded,” said Iradian
While the Federal and Dubai budgets have smaller deficits, Abu Dhabi has a wider deficit due to weak oil prices. Subsidies in Abu Dhabi such as those on natural gas, electricity and water, have been reduced. Fuel prices, which were liberalized in 2015, are being adjusted monthly to reflect global prices.
Nonoil revenue raising measures are planned. These include introduction of VAT at 5 per cent in early 2018, which is expected to yield the equivalent of 1-1.5 per cent of GDP in revenues. These revenues will be shared by individual emirates and the Federal government. Such fiscal adjustment measures are expected to ecourage efficiency and generate savings.
The financing requirements are smaller this year and in 2018. “We expect Abu Dhabi to once again fund its fiscal deficit through a combination of external borrowing and by tapping ADIA’s foreign assets.
With the demand for credit moderating, credit growth decelerated although growth in deposits have accelerated in in the first eight months of this year. The growth in credit slowed to 2 per cent in August, year-on-year, partly to the significant decline in personal loans, which reflects accounting adjustments made by banks to set-off the amount of refinancing related to personal loans
Banks remain adequately capitalized with 1.9 per cent Tier 1 ratio at end-June 2017, nonperforming loans to total loans have declined in recent years to 5 per cent in June 2017. The liquid asset ratio remains comfortable at 22.4 percent at end-June 2017, in part because the government and government-related entities (GREs) increased their deposits. Banks’ wholesale foreign funding stayed stable compared to end-2015.