UAE to start 2017 on strong note

dubai - UAE will be one of the Gulf's best-performing economies in the coming years, says report

The UAE's economy is poised to start recovery in 2017-18 on the country's strong balance sheet, but is likely to record its slowest growth since 2010 this year, Capital Economics said in its latest UAE forecast.

The forecast said recovery is expected in the 2017-18 fiscal year. "The UAE has been more proactive in terms of economic diversification than other GCC states and is, therefore, expected to cope relatively well with a prolonged period of low oil prices and to be one of the Gulf's best-performing economies in the coming years."

Despite low oil prices, the UAE's economy held up well last year with GDP growth picking up to 3.8 per cent from 3.1 per cent in 2014 - helped by strong growth in the oil sector, it said. The non-oil economy, on the other hand, recorded its weakest growth in five years. "This was largely due to fiscal tightening - fuel prices were deregulated last year and electricity and fuel prices were hiked, while Abu Dhabi cut spending by 20 per cent," it said.

The report noted that as fiscal tightening continues throughout 2016 and the boost from oil falls, growth will fall to two per cent by the end of the year, compounded by the fact that Dubai in particular is highly exposed to weak economic growth across the rest of the Gulf.

According to Capital Economics' Q2 2016 Middle East Outlook, the average GDP growth for countries in the region will be just 1.3 per cent. But institutions, including the International Monetary Fund (IMF) and International Institute of Finance, have predicted the UAE can expect growth of up to three per cent.

The IMF said in a note recently that the growth of UAE's non-oil sector is expected to increase above four per cent in the medium term, thanks to recovery in oil price, pick-up in private investment in the run-up to the Expo 2020 and a host of other factors.

"Economic activity is expected to moderate further in 2016, before improving over the medium term. Over the medium-term, non-hydrocarbon growth is forecast to increase to above four per cent as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions as oil prices rise, a pick-up in private investment in the run-up to the Expo 2020 and stronger external demand," the IMF executive board said in an assessment note of the country's economy.

Executive directors welcomed the UAE's resilience to the oil price shock. Directors commended the authorities for prudent policies which helped build large fiscal and external buffers and strengthened the economy.

The IMF said persistent lower oil prices continue to pose challenges. Directors underscored the need for sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability and promote long-term growth.

IMF directors welcomed the authorities' commitment to pursue fiscal consolidation. For the near-term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimise the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure intergenerational equity.

The executive board of the IMF also called for the Emirates to ease restrictions on foreign direct investment (FDI) in the new investment law and spur competition. Directors called for continued action to increase productivity and foster competitiveness.

"Efforts should continue to improve the business environment, ease restrictions on FDI in the new investment law and spur competition. In addition, priority should be given to upgrading the quality of education, promoting innovation and entrepreneurship, and facilitating SMEs' and start-ups' access to finance," the IMF said.

- issacjohn@khaleejtimes.com