Abu Dhabi well placed to ride out low crude

10 February 2015

Emirate remains undiversified but strong asset position lessens need for economic reforms

Abu Dhabi has made much of its efforts to diversify its economy away from reliance on the oil and gas sector, but its non-oil industries will do little to buffer the impact of collapsing crude prices.

The hydrocarbons sector represents about 55 per cent of the emirate’s GDP but, more significantly, contributes 90 per cent of Abu Dhabi’s total government revenues.

Ratings agency Standard & Poor’s, which has maintained its ratings for the UAE’s largest emirate despite the oil drop, views Abu Dhabi’s economy as undiversified in spite of government policy to encourage non-oil private sector growth.

Although Abu Dhabi will continue to rely on crude sales, its leadership is perhaps the most prepared of any major oil exporter to weather a period of lower prices.

The emirate’s strength lies in its large net assets position built over years of budget surpluses, which will cushion the impact of lower oil prices on government spending.

The leadership has looked at ways of generating more revenues, such as reforming subsidies for domestic power and water usage, but does not have much short-term flexibility to reform taxes to balance its budget.

Abu Dhabi Crown Prince Sheikh Mohamed Bin Zayed al-Nahyan said on 9 February that the UAE needs to be prepared for the possibility of having no oil or gas in 50 years.

While the drop in crude prices exposes the lack of diversity in Abu Dhabi’s economy – nominal GDP expected to drop 18 per cent in 2014 – oil and gas will continue to be the backbone of the UAE economy over the next decade and beyond.

Abu Dhabi will only have reason to make major reforms in economic policy if the crude market remains depressed for a number of years.

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