Weaker oil to moderate UAE's growth this year

Abu Dhabi - Country best positioned in GCC to withstand lower price

The UAE economic growth is moderating on the back of sharply weaker oil price, softening property prices in Dubai, gradual fiscal tightening and strong US dollar, says a research note.
"We expect real GDP growth to decelerate in 2015 and 2016, though to remain comfortably positive. Interim indicators point to economic activity moderating in 2015, with the sharply weaker oil price filtering into the non-oil economy. The lower oil price environment is impacting investment spending and consumer confidence," says the UAE Economic Update, a research note by Abu Dhabi Commercial Bank authored by Dr Monica Malik, chief economist ADCB.
The gradually tightening fiscal policy, fall in Dubai property prices, and strong USD are also impacting economic activity, she said. The continuation of core investment projects and the healthy performances of key service sectors such as tourism support the economic outlook.
The UAE is among the best positioned of the GCC countries to withstand the lower oil price environment due to its comparatively diverse economy and strong FX reserves, according to the research note.
"We see headline real GDP growth moderating to 3.7 per cent in 2015 from 4.6 per cent in 2014 and real non-oil GDP growth decelerating to 3.9 per cent from 4.8 per cent," says Malik.
She believed that stronger investment linked to the Dubai Expo 2020 should help to boost growth from 2017.
The UAE has been one of the most proactive GCC countries in terms of implementing fiscal reforms in 2015, despite its economy being among the most resilient. A tighter fiscal stance is being taken on both the expenditure and subsidy reform fronts, the research note said.
"We see this as highly positive for fiscal sustainability, and now see a narrower and relatively contained fiscal deficit of -3.6 per cent of GDP in 2015. We also view the gradual approach being taken to fiscal reform as positive for sustainable future growth, believing that it reduces the likelihood of a sharp spending retrenchment in future," she said.
"We expect further fiscal reforms going forward, as oil prices look likely to remain depressed during our two-year outlook period. The government has indicated that it is considering revenue reforms, including introducing VAT and corporate taxation," the research note said. Monetary conditions are also tightening as banking sector liquidity moderates. Interbank rates have started to increase from their previously low levels, due largely to the government tapping banking sector deposits to help cover spending as oil revenues decline.
Meanwhile, credit growth remains solid. "We expect interbank rates to continue rising in the last quarter of 1015 and 2016 in response to the ongoing withdrawal of government deposits prompted by the weak oil price."
However, the expected moderation in lending growth could partly offset the tightening at the end of 2015 and in 2016. She forecast nominal GDP growth or change in price and output to contract by -9.6 per cent in 2015 on the back of the sharply lower oil price.
In real terms, change in production, she forecast headline GDP growth to soften to 3.7 per cent in 2015, with real non-oil GDP growth decelerating to 3.9 per cent. This would be down from solid 4.6 per cent real GDP growth and 4.8 per cent real non-oil GDP growth in 2014. Oil GDP should also contribute positively to headline real GDP growth, as it did in 2014, with output increasing. We currently forecast that real non-oil growth will decelerate further at a more moderate pace in 2016.
The oil market is forecast to remain oversupplied on the back of stronger expected exports from Iran. She forecast annual inflation of four per cent in 2015, up from 2.3 per cent in 2014 and 1.1 per cent 2013. The acceleration is due to subsidy reforms, as oil prices have been linked with the international prices. In 2016, she forecast inflation to fall around 3.1 per cent.
- haseeb@khaleejtimes.com