UAE ready to manage oil price strain

dubai - Low debt stock and high level of reserves leave it well-positioned to cushion the impact

The UAE's low aggregate debt stock and high level of reserves leave it well-positioned to comfortably manage any strain it may face in the medium term even if oil prices were to fall back below $50 per barrel, economists at the largest Japanese bank said.

MUFG Bank economists said they expect the UAE to be the best performing economy in the GCC region despite regional geopolitical tensions.

"To an extent, this optimism marks the strength of the UAE's core balances, which we envisage will see the economy generate trade and current account surpluses over the medium term. This is in marked contrast with other GCC economies that have still to come to terms with the 2014 oil price slump," they said.

They held the view that as a consequence of the UAE's low debt stock and high reserves, the oil price slump has had a less far-reaching impact on the UAE's economic model than the more energy dependent states in the GCC.

"The UAE enjoys the diversified base offered by the hydrocarbon economy of Abu Dhabi in conjunction with the export-oriented service hub of Dubai. While the former underpins stability, we continue to view the latter as the key driver of overall growth, with the pace of expansion strengthened by preparations for the World Expo 2020 that Dubai is hosting," the bank analysts said.

The bank noted that various indicators show positive momentum for the UAE, with tourist arrivals increasing throughout 2017 and passenger throughput at Dubai's International Airport continuing to hit fresh highs.

"Separately, new business formation is picking up and the whole economy Purchasing Managers Index has gained in the back half of 2017, boosted by both demand and new orders," the bank said.

Meanwhile, inflation in the UAE is expected to tick up in 2018 when VAT is brought into effect, but with the tax rate low and inflation expectations firmly anchored, price gains are likely to be contained, MUFG Bank economists said.

"Real estate prices and rents continue to decline and the outlook is frail, but higher emerging market demand should help. Headwinds continue to be built in Dubai's real estate sector, with villa and apartment prices having witnessed continued declines in recent months."

The composite Phidar Advisory Price Index, which comprises 80 per cent freehold apartments and 20 per cent freehold villas in selected communities, declined by 7 per cent year on year in March 2018. The average decline in the first quarter of 2018 was 7.2 per cent compared with 5.4 per cent in Q4 2017, the bank said.

"What's more, rental yields are relatively high and the rental market also appears to be cooling. The broader, rapid build-up of the service sector and transport capacity ahead of World Expo is also of concern, and may struggle to generate the anticipated returns once the event concludes in 2020," they said.

The Japanese bank said Dubai has a significant emerging market (EM) sectoral population with more capital expected to flow into Dubai's property market following improved prospects in EMs heading into 2018.

"Overall, although the Dubai government is expected to continue to spend on infrastructure projects, the level of this spending will inevitably be curtailed over the medium term as spending needs are realigned with the reality of the structural adjustment that is taking place throughout the country."

"While we are comfortable with the overall UAE outlook, prospects remain weaker than historical performance. Average real GDP growth of 3.2 per cent between 2018 and 2022 is solid but still falls short of the pace of expansion generated prior to the 2014 oil price decline. The key risk is that weaker-than-expected demand exposes capacity excesses that have built up after years of heavy investment. Meanwhile, policy options appear to be limited," said the bank's analysts.

They noted that the recent dollar-driven forex weakness will help improve competitiveness though the UAE currency remains strong in real effective exchange rate terms and the demands of the dollar peg will likely see the policy rate hiked in line with the US Fed's expected 3 rate hikes in 2018.

"The recent recovery in oil prices will help boost confidence, though revenues remain short of the level that would likely prompt the prudent and conservative Abu Dhabi government to begin any fresh rounds of fiscal stimulus," the economists said.

- issacjohn@khaleejtimes.com