Lower oil prices once again were the dominant theme for the UAE’s economy in 2017, even as the country was able to weather the impact of smaller energy revenues better than most of its neighbours.
But the economy is expected to turn a corner in 2018, thanks to a combination of stabilising oil prices, higher infrastructure spending by the Government, and a slowdown in fiscal consolidation.
The UAE's economy, which grew 3 per cent in 2016, is expected to record growth of around 2 per cent for 2017, according to economists polled this month by Bloomberg, thanks to a drop in oil revenues attributable to the country's participation in a deal struck last year by Opec and non-Opec producers to jointly reduce crude output by 1.8 million barrels per day.
The economic impact of lower oil revenues was especially felt in Abu Dhabi, which holds over 90 per cent of the country’s oil reserves, with the IMF estimating growth of as little as 0.3 per cent in the emirate’s GDP for 2017.
Abu Dhabi has been not idle in the face of such a situation, continuing to cut spending and to consolidate key sectors of the economy. January saw the completion of the merger of the sovereign wealth funds International Petroleum Investment Company (Ipic) and Mubadala Development Company to create the Mubadala Investment Company. FGB and NBAD, two of the emirate’s largest banks, came together to form First Abu Dhabi Bank (FAB), while Khalifa University, the Petroleum Institute and the Masdar Institute of Science and Technology joined to form the Khalifa University of Science and Technology.
Faced with such consolidation measures, further spending cuts for 2018 are expected to be milder than those witnessed in the past two years.
Dubai’s economy fared better in 2017, thanks to a recovery in world trade, which is forecast to grow 4.2 per cent in 2017 from 2.4 per cent in 2016, according to the IMF. The emirate's tourist numbers continued to rise in 2017, in spite of the strength of the US dollar. Dubai's real GDP, which grew 2.9 per cent last year, is projected to grow 3.2 per cent in 2017 and 3.5 per cent in 2018, Dubai’s Government said this month, its predictions largely in line with those of the IMF.
While GDP growth for the UAE as a whole for 2017 has narrowed, economists have applauded the country’s fiscal discipline. Emirates NBD, Dubai’s largest bank, forecasts the country’s budget deficit for 2017 to be equivalent to around 3.4 per cent of GDP, compared with 4.3 per cent in 2016, with the budget forecast to return to surplus by 2019.
“The UAE’s fiscal discipline and a more diversified revenue stream has resulted in it achieving the small budget deficit in the GCC in 2017,” says Tim Fox, the bank’s head of research and chief economist.
Such fiscal discipline in the past two years especially means that the country can afford to increase spending and investment in 2018.
“We expect to see a pick-up in some areas of government spending, supported by a contained fiscal deficit and an improved revenue outlook,” said Monica Malik, the chief economist of ADCB, who noted that the UAE has been one of the most proactive in the GCC and has front-loaded fiscal reforms.
Any further spending retrenchment in Abu Dhabi in particular is is likely to be limited, ADCB forecasts, given the progress the emirate has made so far.
Such fiscal discipline in the past couple of years, along with improving sentiment in international energy markets since September, means that the UAE Government will begin to start spending again in 2018, even if consumer spending remains flat.
The UAE’s federal budget – which accounts for around 14 per cent of the country’s consolidated fiscal spending - will see a 5.5 per cent rise in spending in 2018 from flat levels in 2017, according to research from ADCB.
Dubai this month unveiled planned spending of Dh56.6 billion for the coming year, a 19.5 per cent increase on 2017’s budget. Infrastructure spending will rise 46.5 per cent during the year, as the emirate continues preparations for Expo 2020.
The IMF, meanwhile, forecasts that Abu Dhabi’s GDP growth will surge to 3.2 per cent in 2018, on the back of higher oil prices, enabling the emirate to push forward with infrastructure projects.
Such infrastructure spending throughout the country is set to drive economic growth more than consumer spending, which is forecast to remain subdued following the introduction of VAT in January, as has been witnessed in other countries implementing such measures for the first time.
“There are signs of household spending being frontloaded, whilst corporates will have to deal with regulatory and administrative aspects of VAT [including building internal systems and the impact on cash flow],” says Ms Malik. Emirates NBD in turn predicts that inflation will rise to around 3.5 per cent next year from 2 per cent in 2017, following the tax’s introduction.