UAE still vulnerable to oil prices

14 July 2015

Non-oil sectors in the country represent only 21 per cent of the budget revenue, so the decline in crude prices will likely see the government running a deficit

2015 breakeven oil price $73

2014 breakeven oil price $74

Although the UAE has a more diversified economy than its GCC neighbours, economic forecasts indicate it will still be significantly affected by the drop in global oil prices.

The country is estimated to require an average crude price of about $77 a barrel in 2015 to balance its books, and even the most bullish of oil analysts do not predict prices to rise above this.

Non-oil sectors in the UAE represent just 21 per cent of the budget revenue and 45 per cent of total exports. This means the drop in oil revenues in 2015 will likely see the government running a fiscal deficit.

Abu Dhabi consolidates

Although Abu Dhabi has substantial reserves built up from several years of fiscal surpluses, its actions – excluding the surge in counter-cyclical energy spending – suggest another period of consolidation and efficiency savings can be expected. This will inevitably have implications for the vibrancy of the wider economy and for those doing business in the emirate.

The governments of the UAE and the individual emirates must look hard to see where they can cut costs without sacrificing economic growth.

Abu Dhabi is thought to be considering ways to reform its subsidies for electricity and water. The Washington-based IMF estimates that subsidies and transfers accounted for nearly 20 per cent of the emirate’s budget, or AED47.8bn ($13bn), in 2014. The motivation behind the overhaul of its tariff system has been put down to the tightening supply and demand balance for power and water, and the rising pressures on state funds from the drop in oil prices.

Demand for utilities in the capital has grown at a rapid pace as its population has more than doubled over the past decade and energy-intensive industries have been developed. As a consequence, a shortfall of power and water is expected in the next few years unless new capacity is brought online or demand growth is effectively controlled through government policy.

Abu Dhabi could use the downturn in oil revenues to try to decrease its reliance on crude exports. One of the key long-term objectives enshrined in the Abu Dhabi Economic Vision 2030 strategy is the diversification of the economy.

Economic diversification

The plan includes a call to boost manufacturing’s share of GDP to 10 per cent in 2020 and 24 per cent by 2030. But the current proportion has only increased marginally since the plan was drawn up, and is estimated to still stand at less than 6 per cent.

Abu Dhabi’s attempts at expanding non-oil industries and manufacturing have been hampered by a lack of gas supplies as the UAE has moved from being a gas exporter to a net importer. Potential expansions at the emirate’s flagship gas-based petrochemicals and steel manufacturing sites have been slow to materialise and appear to be on hold until further gas supplies can be freed up.

Dubai debt

Dubai’s major challenges include its long-running debt problems. The emirate’s government and its subsidiaries still face extensive debt obligations left over from the previous construction boom. There is an estimated $139bn-worth of outstanding debt, including that owed by government-related entities (GREs) with minority state ownership.

The IMF has downgraded the outlook for economic growth in the UAE twice since oil prices began to fall in the summer of 2014. The fund has advised the country, along with its GCC neighbours, to reduce total planned expenditures to offset falling oil revenues.

In October 2014, the IMF cut its forecast for 2015 real GDP growth in the UAE by a whole percentage point, to 3.5 per cent from 4.5 per cent. This was followed in April this year by a further revision to 3.2 per cent.

The predicted sluggish growth of 0.2 per cent in oil GDP is expected to be offset by a 4.4 per cent increase in non-oil GDP in 2015. The UAE is expected to continue robust growth in its non-hydrocarbons economy despite the downturn in oil-related sectors. Real GDP expanded by an estimated 4.5 per cent in 2014 on the back of a stronger performance in sectors including tourism and hospitality, trade and services, aviation, banking and finance, manufacturing and real estate.

However, in terms of nominal GDP, which takes into account commodity price movements, the UAE economy is expected to contract by 9.4 per cent in 2015. This is a drop to $363.7bn, from $401.6bn in 2014. A recovery to $392.1bn is expected next year.

Financial reserves

The fall in crude prices has reduced the UAE’s spending power, but the impact will be cushioned by the country’s strong financial reserves and diversified economy, the Washington-based International Institute of Finance said in a May report.

Abu Dhabi has reported four consecutive years of double-digit fiscal surpluses, but this year, it is expected to post a marginal deficit of about 1 per cent, according to US ratings agency Moody’s Investors Service. But the reserves accumulated through previous surpluses should be enough to offset the impact of lower oil revenues in 2015 and potentially over the coming years.

Suitably cushioned

The emirate has off-budget assets stored in investment vehicles such as Abu Dhabi Investment Authority (ADIA), Abu Dhabi Investment Council, International Petroleum Investment Company (Ipic) and Mubadala Development Company. For instance, ADIA alone held an estimated $498bn in assets in 2014. The total assets of these entities exceed the liabilities of GREs in Abu Dhabi and all other emirates.

The UAE capital’s assets also comfortably cover its debt level, according to Moody’s. Abu Dhabi’s total debt represents about 40.5 per cent of GDP, or about $105bn, while the central government’s debt represents just 2.7 per cent of GDP.

However, a prolonged period of low oil prices would see the capital’s fiscal buffer gradually weaken unless the government limits spending increases and effectively manages the debt of GREs in Abu Dhabi and other emirates.

There have long been major issues with Dubai-based GREs repaying debts, and the fall in oil prices has led to concerns that the emirate could see a repeat of the debt crisis it experienced in 2009. In February 2015, Dubai World Group (DWG) reached an agreement with creditors on a second restructuring of its $14.6bn debt, reducing its overall risk profile.

Debt agreements

According to the US’ Bank of America Merrill Lynch, the DWG deal, along with other agreements, means Dubai has successfully dealt with its debt maturities for 2015. It has nearly $6bn of debt due in 2016.

In December, the UAE’s Federal National Council (FNC) approved a budget of AED49.1bn for 2015, increasing the planned spending by AED2.9bn from 2014.

Despite this, FNC members said they were not able to approve funding for several projects planned to be developed this year. More than 80 per cent of most federal agencies’ budgets were allocated to public sector salaries.

Sheikh Mohammed bin Rashid al-Maktoum, vice-president and prime minister of the UAE and ruler of Dubai, said the federal budget will go towards health, education and social services, as well as developing government services for UAE citizens.

The federal budget represents about 14 per cent of overall fiscal spending in the country, with the remainder made up of the individual budgets of the seven emirates.

In early January, Dubai released details of its spending plans for 2015. With only 4 per cent of government revenues coming from oil, the emirate’s budget is not heavily dependent on international barrel prices.

Keen to continue developing, the Dubai government plans to spend AED5.3bn on infrastructure projects during 2015.

The spending plans were revealed as the emirate approved a budget of AED41bn for 2015, up 9 per cent on the budget for 2014. The government says the spending plan will create 2,530 job opportunities, and will continue to stimulate economic growth and enhance the social services sector.

Wage bill up

Dubai’s capital expenditure is budgeted to drop 16 per cent to AED35.7bn, while the wage bill is projected to increase 9 per cent, representing a constant 37 per cent share of total spending, according to Bank of America Merrill Lynch.

The emirate’s projects market took a big hit in the debt crisis of 2009 and remained quiet for the following two years. However, engineering, procurement and construction awards have increased every year between 2011 and 2014.

Dubai’s construction industry received a boost when the emirate won, in November 2013, the competition to stage the World Expo in 2020. Dubai has structured much of its infrastructure development around the event, saying it will require more than $7bn of investment for development and operational costs until the end of the six-month show.

Expo projects

The Expo site, where pavilions and other attractions will be built, covers 168 hectares within the Dubai Trade Centre Jebel Ali development. This is part of the Dubai World Central development that also encompasses Al-Maktoum International airport, set to be the largest airport in the world.

The Expo 2020 investment plan includes additional infrastructure to deal with the 25 million visitors the government says will come to the event. The project will be a shot in the arm for Dubai’s construction sector, which looks to be slowing down in 2015 after four years of growth in project spending since the lows of 2009-10.


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