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Fiscal Expansion to be Funded by Surpluses

Although UAE’s real GDP growth will slow, EFG-Hermes said its growth will remain at respectable levels and supported by the continuation of the investment programme and buoyant government expenditure.

Even if oil prices were to be sustained below the fiscal break-even level of $44, it expects fiscal expansion to continue, funded by the surpluses accumulated over the past years.

Despite this weakening outlook, the UAE is in a strong position to face the challenges, given the fiscal and current account surpluses realised over the last few years and a buildup in net foreign assets (NFA).

There are however some positive signs to this new economic reality. Economic activity will be based on more sustainable foundations and speculative activity in the economy will fall substantially.

The tighter funding conditions and new economic reality will inevitably hit some of the regions more imaginative and grandiose projects, which became more feasible in H1 2008 with the availability of cheap financing and the soaring oil price.

With the recent fall in oil prices, the focus will again return to quality and to projects crucial to the economy, such as those in infrastructure.

Moreover, the low budget breakeven, of $44 per barrel in 2009 provides another layer of support for the economy and government spending.

“We believe that the government will use its NFA to support spending on its investment programme if the oil price averages less than $44 per barrel in 2009. We are assuming an oil price forecast for Brent crude of $72 per barrel in 2009, down from $100.2 in 2008,” said the EFG-Hermes research note.

However, the key risk to assumption is a lower oil price in 2009.

EFG-Hermes predicted oil prices to average $72 per barrel in 2009 and $90 in 2010.

Crude oil prices fell below $44 a barrel last Thursday on US economic slowdown.

Goldman Sachs’ energy equity research team, which predicted that crude oil could spike as high as $200 a barrel, slashed its forecast for 2009 on Friday, to just $45, as demand deteriorates.

Peter Barker-Homek CEO of Abu Dhabi National Energy Co. (Taqa) last month predicted oil prices could surge to $200 a barrel by the end of 2009 if the recent price slump continues into next year.

haseebhaider@khaleejtimes.com