UAE economy set to recover its vigour in 2018

19 February 2018
Stronger oil prices, growth in global trade and the anticipated easing of fiscal adjustment should result in improved economic performance

The UAE economy is headed for a bumper year in 2018, according to forecasts made in January by several senior figures from the Ministry of Economy, predicting a GDP growth rate of up to 3.9 per cent for the year.

While the Washington-based IMF posted a slightly lower projection of 3.4 per cent last October, and the Institute of International Finance forecast a growth rate of just 2.9 per cent in November, the general sentiment is consistent with a doubling of the various 1.3 to 1.6 per cent growth estimates for 2017.

Oil-price impact

These bullish projections are backed by the strengthening and stabilisation of oil prices on global markets, which continue to see the price of a barrel of Brent crude nudge the $70 mark.

The UAE’s growth in 2017 was dampened by cuts to the national oil output under the Opec/non-Opec deal. UAE oil production averaged 2.9 million barrels a day (b/d) in the fourth quarter of 2017, compared with 3.1 million b/d in 2016 as a whole, according to oil producers’ group Opec.

“With Abu Dhabi, half of its GDP is still hydrocarbons, so any decline in oil production is going to weigh heavily on its GDP,” says Khatija Haque, head of Middle East and North Africa (Mena) research at local bank Emirates NBD.

Overall, the UAE’s total production for 2017 was 121,000 b/d lower than its total production in 2016.

Non-oil uptick

Activity in the UAE’s non-oil sector increased in the final quarter of 2017, and “expanded sharply” during the last two months of 2017, according to Emirates NBD’s UAE Purchasing Managers’ Index (PMI), due to a strong rise in output and new orders. December saw the fastest growth in new business since February 2015.

The headline seasonally adjusted Emirates NBD UAE PMI for December rose to 57.7, notably higher than the full series average of 54.6, signalling an improvement in business conditions in the non-oil private sector. This activity contrasted with a subdued non-oil performance during the rest of the year, when employment and wage growth were “relatively muted”, according to Haque.

Value-added tax

While the pending introduction of VAT on 1 January likely spurred activity in the fourth quarter of 2017, the non-oil growth trend continued in January, even as the month saw the sharpest rise in input costs in 74 months, according to the PMI survey.

“The impact of VAT is evident in the sharp rise in input costs,” Haque notes. “While selling prices also increased in January, the survey suggests that the full rise in input costs was not passed onto consumers.”

According to the IMF, the UAE’s consumer price index is expected to rise modestly, from 2.1 per cent in 2017 to 2.9 per cent in 2018. The 5 per cent tariff, meanwhile, is expected to boost the state’s coffers by AED12bn ($3.27bn), in an important step towards diversifying the state’s finances, and provide a buffer against volatility in global oil prices.

This is in addition to the new excise taxes levied on tobacco and carbonated drinks from October 2017, which are expected to generate a further AED7bn in annual income for the federal budget.

Dubai growth

Speaking at the UAE Economic Outlook Forum, Abdullah al-Saleh, undersecretary for foreign trade at the Ministry of Economy, also attributed the forecast 2018 growth to planned government investment in infrastructure projects and expected growth in foreign trade, which could benefit Dubai in particular.

This is in line with statements by Garbis Iradian, chief economist for the Mena region at the Institute of International Finance (IIF), who notes that most of the non-oil growth is coming from Dubai as it prepares to host the Expo 2020.

Mixed results

While the Emirates NBD Dubai Economy Tracker Index, which is designed to give an overview of the non-oil private-sector economy, unexpectedly fell from 55.3 in November to 54.7 in December, the emirate’s overall growth trend remains strong – underscored by the improvement in its construction sector.

“The decline in the Dubai Economy Tracker Index in December is a little surprising, but appears to be broad-based across all the key sectors. Nevertheless, a reading of 54.7 still indicates economic growth,” says Haque.

“We’ve seen the non-oil economy pick up, given the infrastructure investments associated with Expo 2020. Looking at 2017 as a whole, the survey data suggests that Dubai’s economy grew at a faster rate than in both 2015 and 2016.”

In contrast, Abu Dhabi’s 2017 performance, Iradian says, “was impacted negatively by the drop in production, but even its non-oil sector was relatively weak, which reflects the tight fiscal situation of the past two years”.

Financial buffers

Overall, the IIF expects the UAE to remain the best-managed economy in the region, due to its large financial buffers – estimated at about $670bn – established infrastructure and relatively diversified economy.

The UAE’s record budget in 2018 involves a capital outlay of AED51.4bn ($14.0bn) over the course of the year. Dubai has also approved its largest-ever public budget for the year, at AED56.6bn, with 21 per cent of the total allocated to infrastructure spending with a view to Expo 2020. At the same time, the consolidated fiscal deficit is expected to shrink to 0.8 per cent of the GDP, down from 3 per cent of the GDP in 2017, according to the IIF.

Despite predictions of a slowdown in economic growth elsewhere in the region, the IIF expects the UAE’s economic performance to continue to improve in 2018, with firming oil prices, growth in global trade and the expected easing pace of fiscal adjustment.

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