UAE economy to ride on non-oil sector and infrastructure spending – UAE economy nonoil sector

UAE economy nonoil Sector UAE economy nonoil Sector UAE economy nonoil Sector UAE economy nonoil sector

UAE economy to ride on non-oil sector and infrastructure spending

Despite bearish sentiments, the IMF and Bank of America Merrill Lynch, concur that medium term non-oil growth will reach 3 per cent or higher, thanks to investments in the lead-up to Expo 2020

UAE economy nonoil sector
Above, Jumeirah Towers in Abu Dhabi. Resumption of spending on key projects in Abu Dhabi and Expo2020 in Dubai will buoy non-oil GDP growth. David Tanecek / CTK via AP Images

The UAE’s economy will expand on the back of non-oil sector growth over the next 18 months, as Abu Dhabi loosens its purse strings and Expo 2020-related spending in Dubai start to kick in, according to economists.

That estimation comes after the IMF on Friday cut its outlook for the country’s economy due to the continued pressure on oil prices, which is down 14 per cent year-to-date, despite a global oil output cut, in which the UAE is participating, that has so far failed to reduce inventories and prop up prices.

Besides the anticipated spike in Expo 2020 spending, Abu Dhabi is expected to reduce its austerity drive, increase spending and revisit projects that have been postponed.

“Abu Dhabi has done a lot of cleaning up already and they definitely have the firepower to resume spending on their projects,” said Mohamed Abu Basha, a senior economist at Egyptian investment bank EFG-Hermes. “Growth drivers [in the UAE] are more certain than other countries.”

Although there are no official economic growth projections for the UAE, the central bank said in its first quarter economic review that growth in non-oil GDP will rebound this year to 3.1 per cent and to 3.7 per cent in 2018, thanks to easing of fiscal consolidation and growth in the UAE’s trading partners. The UAE economy grew 3 per cent last year, according to the Central Bank.

The IMF forecasts that overall growth this year will reach 1.3 per cent, compared to its 1.5 per cent forecast made in April due to a slower expansion in the non-oil economy, which will grow 3.3 per cent, compared to 3.8 per cent in its previous forecast.  The growth projection for next year was lowered one percentage point to 3.4 per cent from 4.4 per cent in April, owing to an easing of oil growth to 3.2 per cent, compared with 6.2 per cent in the previous forecast.

The IMF is not alone in its bearish outlook, with several economists projecting lower-than-expected growth figures for the UAE.

Bank of America Merrill Lynch is among the most bearish, projecting in April 0.9 per cent growth for this year that will be driven by 2.7 per cent growth in non-oil GDP, primarily from Expo-related projects.

The political and economic rift with Qatar could also dampen investor sentiment towards the region, economists have warned.

“The recent tension/rift with Qatar may also adversely impact economic activity in all GCC countries (including the UAE),” said Garbis Iradian, a senior Mena economist for the Institute of International Finance.

Most economists, though, agree the non-oil GDP sector will gradually gain more clout.

The IMF and Bank of America Merrill Lynch, for example, concur that medium term non-oil growth will reach 3 per cent or higher, thanks to investments in the lead-up to Expo 2020. The fund also pointed out that the introduction of a 5 per cent value added tax (VAT) in January next year will not have a “significant adverse impact on growth”.

But when it comes to predicting oil GDP, economists disagree because of divergent oil price projections.

The IMF forecast for the UAE’s average crude oil export price is US$52.9 a barrel for this year and $53.1 a barrel for next year. In its April release of the World Economic Outlook, it had estimated global oil prices will average $55 a barrel in 2017–18. The fund is due to release a new outlook later this month.

Brent crude futures are down year-to-date to $48.91 a barrel from $56.82 a barrel at the end of last year, as a global oil output reduction agreement has so far failed to curtail a supply glut amid rising production from non-Opec countries such as the United States, where shale oil production is rebounding.

Opec and a group of countries led by Russia agreed to extend a six-month agreement to cut oil production that ended in June into the first quarter of next year. As an Opec member, the UAE has to adhere to the cuts, and the lower output is denting growth.

“Lower oil prices affect private sector sentiment and may lead to tighter fiscal stance,” said Mr Iradian.

Economists agree that the UAE’s economy may face challenges to growth. Besides oil prices, the IMF said growth might be impacted by protectionism and tighter financial conditions as a result of higher US interest rates, which invariably affects the UAE dirham which is pegged to the greenback.

“The biggest risks stem from downward pressure on oil prices, tightening of financial conditions, and trends in global trade,” said Dima Jardaneh, an economist at Standard Chartered bank.