Higher oil prices and increased production helped revenues to rise 41 per cent to Dh440bn. Pawan Singh / The National
Higher oil prices and increased production helped revenues to rise 41 per cent to Dh440bn. Pawan Singh / The National

Business

UAE's budget in the black, despite Abu Dhabi spending rise

The UAE reached a fiscal surplus last year for the first time in three years, despite a bigger than expected spending increase in Abu Dhabi.

Tom Arnold

June 12, 2012

The UAE reached a fiscal surplus last year for the first time in three years, despite a bigger than expected spending increase in Abu Dhabi.

Surpluses reached Dh38.6 billion (US$10.5bn), or 2.9 per cent of GDP within the consolidated budget, which includes spending and revenues for all the emirates and the federal Government, according to an IMF report.

Higher oil prices and increased production helped revenues to rise 41 per cent to Dh440bn.

This represented a turnaround from deficits during the two previous years, as the global financial crisis sank oil prices and prompted a property crash in Dubai.

Last year's balanced budget came about even though the Abu Dhabi Government increased spending by 21 per cent last year to Dh315bn. The emirate's budget accounts for more than two thirds of total consolidated spending. Its revenue rose by 46 per cent to Dh281bn, with a large part of that due to higher oil revenues.

"Abu Dhabi's spending was higher than expected last year," said Giyas Gokkent, the chief economist at National Bank of Abu Dhabi. "The signs were that it would [be] kept at a similar level to last year but one-off trends have come to the agenda."

Loans and equities extended by Abu Dhabi rose 39 per cent to Dh88bn during the year. Lending to housing and building projects may be behind the increase, said Mr Gokkent.

Another big driver was spending on federal services, which are mainly outlays on defence and security. Spending in the area rose from Dh72.7bn the previous year to Dh80.3bn last year, the data showed.

Transfers from the capital to Dubai dropped to Dh9.9bn last year from Dh11bn the previous year. Abu Dhabi agreed to contribute to a $20bn assistance for Dubai in 2009 after the emirate warned it might not meet its debt obligations.

Subsidies and transfers by Abu Dhabi rose to Dh33.6bn from Dh25.6bn in 2010. Meanwhile, water and electricity support edged up to Dh12.4bn from Dh10.8bn.

"Other" grants and transfers more than doubled to Dh13.3bn. Support to the Northern Emirates dropped slightly to Dh1.6bn. Food subsidies rose to Dh409 million last year, from Dh40m the year before.

This follows the Government's move last year to increase its spending on welfare support in an effort to improve the living standards of nationals. Such spending included more than $2bn in housing loans for Emiratis.

The increase was in line with a rise of more than a third to Dh53.8bn in subsidies and transfers in the consolidated budget.

"Economists tend not to prefer subsidies as they can distort the market but you can make a case for it if it's targeted and can be good to redistribute wealth," said Khatija Haque, a senior GCC economist at Emirates NBD.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”