UAE most promising economy in Mena
The reduction of energy subsidies, revaluation and reprioritisation of current and capital spending, discontinuation of projects are among the strategies used by some GCC countries to adjust to the new oil price norm.
Dubai - Nation set to outpace region's growth, has best long-term prospects
With an average annual growth forecast of three per cent, the UAE has the best long-term economic prospects in the Middle East and North Africa as the rest of the countries in the region face the toughest year in almost three decades in 2016, according to an economic research consultancy based in London.
While overall the Mena region as a whole will expand by just 1.3 per cent this year, marking the weakest growth since the late-1980s, Gulf countries will continue to tighten fiscal policy in response to low oil prices, says Capital Economics' latest Middle East Outlook.
The tightened GCC fiscal policy should ensure that dollar pegs remain intact as it will cause economic growth to slow sharply this year, the report said.
"And, in contrast to the consensus, we expect growth to remain weak from 2017 onwards. The outlook is poor in the rest of the region too. In Egypt, depressed tourism revenues, as well as tighter fiscal and monetary policy, will result in extremely sluggish growth this year. And Morocco's economy, whose medium-term prospects are the brightest in the region, will also see growth weaken, due to a drought," the report said.
The latest growth forecast by Capital Economics for the UAE complements the upbeat projection recently made by International Institute of Finance, or IIF.
Data from the Washington-based IIF indicates that the UAE's growth rate will be three per cent, which is one per cent higher than the recent World Bank's forecast of two per cent, on the backdrop of a global growth of 2.6 per cent in 2016. The IIF's Global Economic Monitor pegs the UAE's growth in 2017 at 3.1 per cent as it predicts inflation in the second-largest Arab economy to slow down to 1.7 per cent in 2016 from four per cent in 2015 while the current account balance to drop below one per cent of the GDP. The IIF pegged UAE growth in 2015 at 3.5 per cent.
The International Monetary Fund in a recent report noted that driven by Dubai's slightly higher economic growth rate, the gross domestic product expansion of the UAE would moderate to 2.4 per cent in 2016 despite headwinds posed by lower oil revenues. The Washington-based fund argued that due to the diversified nature of Dubai's economy, the emirate is poised to record 3.7 per cent growth up from 3.6 per cent last year - far exceeding the average GCC growth forecast at 1.8 per cent for 2016.
According to estimates by the IMF, oil exporting countries in the Middle East lost a staggering $390 billion in revenue due to lower oil prices in 2015, and should brace for even deeper losses of more than $500 billion this year.
The GCC region and Algeria together are expected to post a fiscal deficit of 13 per cent of GDP, down from a surplus of eight per cent in 2013, reflecting the high reliance of these budgets on oil-related revenues, the IMF said. Fiscal deficits of GCC countries and Algeria are still projected to average about seven per cent of GDP in 2021. The cumulative deficits for this country group are expected to reach almost $900 billion during 2016-21. Gross government debt is projected to increase from 13 per cent of GDP last year to about 45 per cent of GDP in 2021. Over the medium term, the IMF expects oil exporters to continue curtailing public investment, but also to broaden spending restraint to curb the public wage bill and achieve further subsidy cuts.
Ratings agency Standard and Poor's said in its report that GCC governments, in response to sinking oil prices, are introducing a mix of spending cuts and revenue-boosting initiatives to reduce their fiscal deficits and the speed of external asset burning.
"The reduction of energy subsidies, revaluation and reprioritisation of current and capital spending, discontinuation of projects are among the strategies used by some GCC countries to adjust to the new oil price norm. Additional measures such as the introduction of value added tax in the GCC by 2018-19 or partial privatisation of state companies are in the pipeline," it said.