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Non-oil sector to spur UAE growth in 2015

Isaac John (associate Business Editor)
Filed on January 4, 2015

Vibrant non-oil sector to spur UAE growth in 2015 as tourism, hospitality, aviation, banking, trade and services will continue upward trends, writes Issac John

The International Monetary Fund forecasts that irrespective of oil price dip, the UAE’s economy is on track to grow a further 4.5 per cent in 2015. Photo by Rahul Gajjar/ Khaleej Times

The International Monetary Fund forecasts that irrespective of oil price dip, the UAE’s economy is on track to grow a further 4.5 per cent in 2015. Photo by Rahul Gajjar/ Khaleej Times

An increasing momentum across all non-oil sectors catapulted the UAE economy into a higher growth trajectory in 2014 in spite of the fallouts of the regional political turbulence and tumbling oil prices on its fiscal and external current account positions.

The Arab world’s second largest economy cruised to a better-than-expected 4.8 per cent growth in 2014 on the back of stronger performance by the country’s vibrant sectors including tourism and hospitality, trade and services, aviation, banking and finance, manufacturing and real estate. 

The International Monetary Fund, or IMF, which revised upward its growth projections for the UAE, Qatar and Saudi Arabia, forecast that irrespective of oil price dip, the UAE’s economy is on track to grow a further 4.5 per cent in 2015, underpinned by its accelerated non-oil diversification, increased government spending and rising foreign direct investment flow.Non-oil sector to spur UAE growth in 2015

The UAE Minister of Economy Sultan bin Saeed Al Mansouri said the impressive growth was possible thanks to the federal government’s policies based on economic diversification and sustainable all-round development. As a result, the non-oil sectors now account for 69 per cent of the UAE’s GDP with oil accounting for the remaining third as the government continues its efforts to diversify away from oil and rely more on non-oil income. The minister predicted the Gross Domestic Product (GDP) of the UAE to reach $419 billion in 2014, an exponential 236-fold surge in the past 43 years since the establishment of the Federation from just $1.77 billion in 1971. 

The Institute of International Finance, or IIF, predicted that the UAE economy is poised to touch $435 billion in 2016, up from $419 billion in 2014 and $405 billion in 2015 under a predicted baseline oil price scenario of $78 and $85 per barrel, respectively, in 2015 and 2016.

Looking ahead past 2014, Al Mansouri said the economy would continue to grow at a rate of between four and five per cent over the next seven years.

“With this good performance, the general budget is expected to see a surplus of nine per cent of the GDP, double the figure of 2012. Inflation rates have been estimated at between two and three per cent   in 2014, thanks to the flexibility of the UAE’s economy and the measures being taken by the government to curb price hikes,” said the minister. Al Mansouri also estimated that the UAE’s bulk commodity exports including oil to have grown by 5.8 per cent to $381 billion in 2014, compared with $354 billion in 2013.

Another sector propelling the economic growth of the country is a vibrant SME segment. The latest data of UAE’s Ministry of Economy shows that SMEs contribute an estimated 40 to 46 per cent of nominal GDP in Dubai, and more than 60 per cent of the UAE’s GDP. They also host the majority of employment opportunities in the country and provide 86 per cent of all private sector employment. A recent study by Dun and Bradstreet revealed that SMEs represent over 90 per cent of the total number of companies in the UAE and account for more than 85 per cent of jobs in the private sector.

Most economists agree with the IMF observation that spurred by a momentum in the non-oil economy, the UAE’s growth in the coming years would benefit from a number of megaprojects and Dubai’s successful bid for the Expo 2020. 

Barclays analyst Alia Moubayed observed that the UAE stood out as the best equipped to face oil price headwinds and is the most capable of adapting to the structural changes in the global oil markets thanks to its remarkable progress in diversification of export and fiscal revenue bases.

The IIF argued that the UAE could achieve such an impressive growth because it has been the beneficiary of private capital flows from other Middle East and North Africa countries following the political unrest that hit the Arab world from 2011. In addition, there has been an influx of wealth from emerging markets like India, Russia, and China. Foreign direct inflows (FDI) more than doubled to $12 billion (three per cent of GDP) while portfolio flows from equity exchange-traded funds and mutual funds to the UAE increased five-fold from 2011 to 2013.

While the capital flows to domestic banks rose sharply, foreign banks’ claims on non-bank UAE sectors have been recovering gradually. The restructured and deleveraged balance sheets are helping many government-related entities (GREs) to raise funds through syndicated loans and bond issuance, allowing them to benefit from the low interest-rate environment.

IIF argues that  a relatively low fiscal and external current account break-even price of oil and ample foreign assets will enable the UAE to press ahead with an estimated $700 billion worth of infrastructure projects expected to come on stream over the next 15 years, spurring credit growth in the banking sector. With the economic growth set to hover between 4.8 per cent and 5.1 per cent in the next two years, the UAE will post a current account balance of $29.9 billion and $30.2 billion respectively in 2015 and 2016, accounting for 7.4 per cent and 6.9 per cent of the GDP.

In such a scenario, the Emirates will record a fiscal balance of 1.8 per cent and 2.8 per cent of the GDP respectively in 2015 and 2016, said Dr Garbis Iradian, Deputy Director, IIF. The coming years will also see the country’s public foreign assets swelling from $ 573 billion in 2014 to $ 615 billion in 2015 and $ 652 billion in 2016. The government debt will register an increase to 22.1 per cent and 23.3 per cent of the GDP respectively in 2015 and 2016.

“The UAE looks resilient vis-á-vis the drop in oil prices, given a relatively diversified economy, excellent infrastructure, a more transparent and better regulated banking system, political stability, and ample foreign assets. Monetary and fiscal policies are expected to remain broadly accommodative,” IIF said.

While real non-oil GDP growth will remain strong at 4.8 per cent in 2015 relatively low fiscal and external current account break-even prices of oil and ample foreign assets would enable the UAE to maintain its high level of spending on infrastructure and major projects and this will support growth in credit by banks. About $700 billion worth of infrastructure projects are expected to be implemented over the next 15 years. Abu Dhabi is expected to continue to make significant investment in the oil and gas industries (which represents about 20 per cent of total planned public investment). The completion of major projects (including Dubai Metro and Al Maktoum International airport in Jebel Ali) and the preparations to host the World Expo 2020 should keep growth in Dubai around five per cent in the coming years, according to estimates.

Tourism is fast growing as a vital pillar of the economy on the back of major infrastructure initiatives undertaken by the government. The total contribution of the travel and tourism sector to the UAE’s GDP is estimated to be Dh122 billion or 8.5 per cent in 2014, a 4.5 per cent year-on-year increase compared to 2013, according to the World Travel and Tourism Council.

The exponential growth in hotel rooms, growing number of tourist attractions, shopping malls, increased connectivity for local and international airlines and a wide array of leisure attractions are underpinning the boom. The total overall contribution of the sector is expected to grow by 3.2 per cent to Dh167.4 billion by 2024, 8.5 per cent of GDP.

According to analysts, tourist influx is set to grow over the coming 5-10 years. Conservative estimates put the international tourist arrivals to reach 39.9 million by 2024, which will generate a tourist spending of Dh105.4 billion. The upbeat outlook emerges as Dubai heads towards Expo 2020 with increasing investments being made by the private and public sector into hotels and the Expo 2020 site in Dubai World Central. Abu Dhabi is also investing in building its tourism profile, which includes the construction of the Louvre and the Guggenheim on Saadiyat Island.

Massive-scale expansion of international airports in the UAE, including the world’s largest — Al Maktoum International with a capacity for 160 million annual passengers — and the fast pace of growth being recorded by the country’s four industry-leading airlines — Emirates, Etihad, Air Arabia and flydubai — have already been driving a relentless surge in the number of international visitors and holidaymakers to the UAE. As a result, almost all hotels across the UAE have been reporting impressive occupancy rates as well as steady growth in average daily rate, or ADR.

The overall economic impact of both aviation and tourism related activities in Dubai is on track to rise to $53.1 billion in 2020 and hit $88.1 billion by 2030 and will support 1,194,700 jobs, Oxford Economics said.

By 2020, as Dubai expects to welcome over 20 million visitors for Expo 2020, it is estimated that Emirates will fly 70 million passengers, and the airline and its partners are already progressing plans for the right infrastructure to be in place to support and capitalise on passenger growth. By 2020, Dubai International is estimated to receive 126.5 million passengers, almost 30 per cent higher than its original 2010 assessments.

In  its latest forecast, the International Air Transport Association  said that the number of passengers travelling to and from the UAE was expected to increase at an average annual pace of 5.6 per cent until 2034, a higher rate than the regional average.  The UAE will add 29.2 million passengers over the next four years at a compound annual growth rate of 6.6 per cent as total global air passenger numbers are expected to rise to 3.91 billion by 2017.

—issacjohn@khaleejtimes.com


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