Consolidations keep the costs, and deficit, down

Abu Dhabi offshore oil consolidation comes amid spate of mergers in the Emirate that have helped fiscal deficit remain steady.

Abu Dhabi's move to consolidate its major offshore oil activities into one company comes on the heels of a number of high-profile ­consolidations aimed at streamlining the emirate's costs and making its main businesses more efficient.

Put together, these consolidations, coupled with a number of austerity measures, have helped keep the emirate’s fiscal deficit within manageable levels and the shortfall this year is likely to be less than previously expected, according to the emerging market specialist lender Standard Chartered.

“The UAE’s consolidated fiscal deficit was contained at 2.1 per cent of GDP in 2015 on the government’s strong consolidation drive,” said Dima Jardaneh, the Dubai-based head of economic research at StanChart. “We now expect the deficit to be limited to 2.8 per cent this year from 4.7 per cent before as the Abu Dhabi Government continues to front-load fiscal consolidation, including by cutting capital spending and transfers to government-related entities.”

Abu Dhabi National Oil Company (Adnoc) is combining its two largest offshore operations, part of its broader effort to streamline management and operations and is the latest consolidation by the Abu Dhabi Government this year. The government has also been trimming headcounts and cutting back on spending on some projects.

The sovereign investment titans Mubadala Development Company and International Petroleum Investment Company (Ipic) announced in June that they would merge to create a US$125 billion entity to increase the diversification of the Abu Dhabi economy and reduce costs.

Garbis Iradian, the chief economist for the region at the Institute of International Finance, estimated at the time that cost savings from the deal should work out to about 20 per cent.

The decision to merge Ipic and Mubadala came weeks after ­National Bank of Abu Dhabi and FGB started merger talks aimed at creating the biggest lender by assets, with $175bn, in the Middle East.

Before Tuesday’s announcement, Adnoc had also been streamlining operations across all of its activities in an effort to drive efficiency, performance and profitability.

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