Abu Dhabi’s economic growth is forecast to slow this year if oil prices remain in their current range, although the credit rating agency Moody’s Investors Service said the government is in a strong position to weather the downturn.
In its latest assessment, Moody’s estimated that the emirate’s economic growth rate would slow this year – to below 3 per cent, from an estimated 4.1 per cent last year – because of a huge drop in oil revenues.
Nominal GDP – economic activity before accounting for inflation – will contract by 18 per cent this year if oil prices average US$55 a barrel, and by 25 per cent if oil prices average $40, Moody’s said. Abu Dhabi will be able to maintain spending by drawing on its vast assets and running a slight deficit (forecast to be 1.1 per cent of GDP this year).
In the past month, the world benchmark North Sea Brent crude has averaged just below $50 a barrel, compared to an average last year of just below $100.
Abu Dhabi’s nominal GDP is estimated to have been $262 billion last year, according to Moody’s, which cites national statistics and the IMF. Abu Dhabi’s economy is much more heavily dependent on oil than the UAE as a whole. The oil sector accounts for about 55 per cent of Abu Dhabi’s GDP, compared to 39 per cent for the UAE as a whole.
Oil is more important than those percentages might indicate as it makes up about 80 per cent of the revenues of the Abu Dhabi government, which in turn shoulders a large share of the federal government’s financial burden. Although its budget runs at a deficit below $80 a barrel of oil, the Abu Dhabi government maintains a high credit rating which Moody’s says “reflects our expectation that resources accumulated during the recent period of high oil prices and a prudent budgeting of oil proceeds will mitigate the negative consequences of oil price volatility on the country’s fiscal and external accounts”. But a prolonged period of lower oil prices is a potential threat.
“What really is dragging on Abu Dhabi’s finances is spending on the federal budget – health, education, roads and the like,” said Mathias Angonin, a Dubai-based analyst in Moody’s sovereign risk group.
“All the increases in spending in recent years would be very hard to reverse.”
Yet, Abu Dhabi – and the UAE as a whole – may be facing a very different financial future if oil prices do not return to the levels they averaged in the previous four years.
“It is an end to the golden years,” said Mr Angonin. “Going forward, it is very unlikely we’ll go back to those conditions.”
Abu Dhabi’s ability to weather the storm comes from its very strong financial position, with reserves derived from several consecutive years of fiscal surpluses. Abu Dhabi’s sovereign wealth fund, the Abu Dhabi Investment Authority, is conservatively estimated by the Institute of International Finance to have been worth $498 billion as of 2014, Moody’s noted.
Other strengths include a sound policy framework, political stability and a very high per capita income.
Abu Dhabi’s central government debt is low, at $7.2bn, or 2.7 per cent of Abu Dhabi GDP.
However, Moody’s warned, “beyond 2015, a prolonged period of low oil prices would lead to the crystallisation of contingent liabilities on the government’s balance sheet, and accelerate the erosion of fiscal buffers.“
The condition liabilities refers to the debt that may be in semi-government institutions.
Indeed, Abu Dhabi’s “credit constraints” include the “large contingent liabilities residing in the debt of its government-related issuers” as well as other emirate governments it supports.
Even if oil prices rebound somewhat by the end of this year and beyond, Abu Dhabi – and the UAE as a whole – will need to continue the financial reforms that already been subject to a rollback in some subsidies, such as cheap utilities prices, as well as continued efforts to diversify the economy away form such heavy dependence on the hydrocarbon sector, Moody’s says.
amacauley@thenational.ae
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