Diversification is vital for UAE growth

Dubai - Country continues to benefit from a safe haven status, large buffers

As the UAE develops its role as a regional hub for trade, finance, transport and tourism, it should intensify policy initiatives to promote diversification amid the current environment of low oil prices and fiscal constraints, the largest Lebanese bank said in its latest economic report.
"The UAE continues to benefit from a perceived safe haven status and large fundamental buffers that have helped restrict the adverse spillovers from contracting oil prices, sluggish global growth and volatility in emerging market economies," Bank Audi said.
As a plunge in international oil prices have eroded UAE's long standing fiscal and external surpluses, real gross domestic product, or GDP, growth is estimated at a moderate three per cent in 2015, against 4.6 per cent in 2014. Non-oil sector is poised to be growing at a rate of circa five per cent, driven by buoyant levels of activity in the tourism and construction sectors.
"The UAE fiscal position has deteriorated in 2015, with the government fiscal balance posting its first deficit since 2009 and the largest ever amidst dwindling oil prices and contracting revenues," said the report.
"This prompted some fiscal adjustments, including the rise of electricity and water tariffs and the deregulation of fuel prices, while the government is considering the possible implementation of a VAT in coordination with other GCC member countries in the aim of bolstering its non-hydrocarbon revenue side," said the report.
General government revenues are estimated to have registered a significant contraction of $44.6 billion in 2015, while general government expenditures moved down $6.2 billion. Fiscal deficit is estimated to have reached 5.5 per cent of GDP in 2015, as compared to a fiscal surplus of five per cent of GDP in 2014.
According to Bank Audi, monetary conditions in the UAE were marked in 2015 by a slower growth in monetary aggregates amidst an oil price slump, a shy rise in the Central Bank's gross international reserves, increased inflationary pressures amidst cuts in fuel and utility subsidies, and a rise in interest rates in line with the US Federal Reserve interest rate hike. The overall Consumer Price Index for the UAE moved up by a yearly 3.5 per cent in November 2015.
The banking sector witnessed during 2015 a slowdown in activity growth. Measured by total assets of banks operating in the country, banking sector activity grew by a decent 6.1 per cent in the first 11 months of 2015 to reach $666 billion in November. The asset growth in volume yet proved 42 per cent lower than that recorded during the 2014 corresponding period. Banks maintain good financial soundness indicators, with adequate capitalisation, acceptable asset quality and strong profit metrics.The UAE capital markets witnessed a trend reversal in 2015, with the UAE equity markets registering the largest price falls since 2008 and the fixed income market coming under downward price pressures amidst an oil price slump and lingering concerns about an oversupplied global oil market, in addition to bets over a US Federal Reserve interest rate hike that effectively took place in December 2015. The Dubai Financial Market index fell from 3,774.00 at end-2014 to 3,151.00 at end-2015, moving down by 16.5 per cent, while the total trading value in the Dubai Financial Market was down by 63.7 per cent. In parallel, the Abu Dhabi Securities Exchange reported price decreases of 4.9 per cent in 2015 with the total trading value falling by 68.3 per cent.
The report noted that the recent hike in US interest rates could lead to a tightening of financial conditions, notwithstanding the impact of lower oil prices on fiscal and external surpluses.
"Export and revenue losses from lower oil prices will be the most significant transmission channel for the UAE economy at large. Growth in the UAE's oil sector is likely to weaken and, with Saudi Arabia ruling out any increase in production in the wake of the crude oil price falls, there will be little opportunity to increase output considerably over the coming years," said the report.
At the external sector level, the current account surplus came under pressure in 2015 to reach one of its lowest levels in a number of years. With the ratio of exports to imports contracting from 154.6 per cent in 2014 to 130.7 per cent in 2015, the current account surplus subsequently declined from 13.7 per cent of GDP in 2014 to 2.9 per cent of GDP in 2015, its lowest level since the global financial turmoil. 
- issacjohn@khaleejtimes.com