A booming oil sector, which is set to expand at a double-digit pace this year, will drive the economic growth acceleration of the UAE in 2022, while significantly improving the country’s fiscal and current-account positions, according to economists and analysts.
A healthy non-oil sector will add further impetus thanks to the government’s reform agenda. “That said, regional tensions, volatile oil prices, and US monetary policy are key factors to watch,” economists at FocusEconomics said.
“Economic conditions appear to have been robust in H1 2022. Oil production gradually picked up throughout the first six months of the year, which, coupled with elevated prices, bodes well for public coffers and government spending. Moving into Q3, oil production rose to the highest level since April 2020 in July,” said Oliver Reynolds, Mena economist at FocusEconomics.
Moody’s said in a recent report that elevated oil prices during the next two years will lead to a significant improvement in the fiscal and external positions of the UAE and other GCC sovereigns, partly reversing their sharp deterioration in their balance sheet since 2015. The rating agency expects the UAE’s real GDP to grow by 6-7 per cent in 2022.
Moody’s expects oil prices to average around $105/barrel in 2022 and $95/barrel in 2023 as geopolitical risks stemming from Russia's military invasion outweigh risks to global oil demand.
“Consequently, most hydrocarbon-exporting sovereigns will run twin fiscal and current-account surpluses, allowing the governments to pay down debts, rebuild fiscal reserves and accumulate foreign-currency buffers, thereby reducing government liquidity and external vulnerability risks,” said Alexander Perjessy, vice-president and senior credit officer at Moody’s.
“However, material improvements in creditworthiness will hinge on the extent to which these sovereigns capture the near-term windfall and deploy it to address structural credit constraints posed by their exposure to cyclical volatility of global oil demand and prices and by longer-term carbon transition risks,” Moodys’ said.
FocusEconomics noted that the UAE’s non-oil Purchasing Managers’ Index in July was higher than its H1 average, as demand strengthened and input cost inflation moderated from June’s over one-decade high. Despite relatively mild inflation, the government deployed further measures to shield consumers in July. On 31 August, authorities unveiled a multiple-entry visa in an effort to benefit from Qatar hosting the 2022 FIFA World Cup, which should support tourist numbers.
According to the International Monetary Fund, the outlook for the UAE economy improved significantly in the first half of 2022 thanks to the surge in oil prices caused by the war in Ukraine. The UAE’s oil receipts in 2022 would be about Dh700 billion, up 46 per cent from its October 2021 projection of Dh480 billion.
The IMF said that Gulf economies would receive up to $1.4 trillion in additional revenue in the next four to five years as oil prices remain high and headline inflation keeps low in the six-member economic bloc.
The IMF expects the oil price, compared to last year, to increase by 55 per cent, which will improve their growth prospects, but also it will be a big windfall in terms of capital flows. — email@example.com
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