Why and how the UAE budget deficit is set to fall
On the back of various measures to support government revenues, the UAE's budget deficit could fall to about four per cent of gross domestic product in 2016 while the GCC region is forecast to register an overall deficit of around 10 per cent of GDP, National Bank of Abu Dhabi predicted on Sunday.
The UAE - the first nation in the GCC to respond to the oil price decline - has reduced state energy subsidies and put off non-critical projects. To boost revenues, the Emirates is also considering alternative methods to fund government spending, including value added tax, income and corporate taxes, privatisations, and bond sales, NBAD, said in its Global Investment Outlook.
The bank cautioned that for the GCC region further fiscal adjustments would be necessary to avoid further "significant asset depletion." The GCC nations are estimated to have had about $ 3 trillion in net foreign assets at the end of 2014, and during 2015 are thought to have seen depletion of about $ 210 billion of that total amount. "We expect that a further $ 180 billion or so of assets could be depleted in the current year," the bank said. Due to high oil prices received over the years, the UAE has been able to build substantial reserves from fiscal surpluses. "The UAE seems to be weathering the storm better than other oil exporting nations. Growth in the private sector has slowed, and liquidity in the banking sector has tightened, " NBAD said.
The bank noted that the UAE has over the years taken steps to diversify its economy away from its previous reliance on hydrocarbons. In 2015, non-oil and gas sectors are expected to have constituted about 75 per cent of nominal GDP. In 2016, according to official sources, the UAE economy is expected to grow by 2.5 per cent while the lifting of sanctions on Iran should boost bilateral trade activity.
"The Mena region as a whole is expected to have achieved economic growth of 2.7 per cent in 2015, with common sense alone suggesting that with much lower oil prices, growth will be lower in the current year. Iran's integration into the global economy and improved growth in oil importing countries is expected to at least partially off-set the impact of the fall in oil prices, however," the bank said.
Supply pressures are expected to persist for the time being in the oil market, with extra supply expected to come on from Iran and Iraq. Iran is expected to reach pre-sanction oil production levels by the end of 2016, meaning an additional 500,000-700,000 million barrels. Saudi Arabia is estimated to have an additional 1.5-2.0 million barrels of capacity available. "With serious pressure on budgets, almost all the oil exporters will register 'twin deficits' (current account and fiscal) for 2015/16," said the forecast.
The bank said the GCC oil exporters' decisions to focus on fiscal policy strongly suggest that for the time being they will maintain their currency regimes, despite pressures resulting from them. "The GCC currency pegs force governments to follow US monetary decisions, irrespective of whether this is appropriate; because the GCC economies, especially Saudi Arabia, are slowing down, they could be facing monetary tightening at the wrong time," NBAD said.
However, despite the asset depletion, the report points out that the GCC countries as a group have financial buffers in place, together with low sovereign debt, and are therefore better prepared than many other oil-exporting nations for low oil prices. Government spending in the GCC countries, although at reduced levels, will still be at levels considered healthy by many other nations, the report added.
Khaleej Times - 22 February, 2016