Rise in public spending to spur UAE growth in next three years

A rebound in government spending will be the key catalyst for a predicted recovery in the UAE's non-oil growth in 2018-20, economic analysts and credit rating agencies said.
Moody's Investor Service, affirming Aa2 stable outlook for the UAE, said it expects increased government spending to underpin the growth in the country's non-oil economy. "After two years of spending cuts, we expect consolidated government spending to increase in 2017."
The ratings agency noted that the credit strengths of the UAE include assumed unconditional support from the government, with estimated assets under management exceeding total liabilities in the UAE's public sector.
"Superior infrastructure supporting diversification, very high per capita income and hydrocarbon reserves of more than 70 years at the current rate of production also support creditworthiness. In addition, the UAE's domestic politics have a track record of stability and the country has strong international relations," analysts at Moody's said.
The UAE's main credit challenge relates to weaker economic and fiscal metrics caused by the oil price shock and the country's fiscal reliance on hydrocarbons (48 per cent of government revenue in 2016). It observed that the UAE's non-oil growth decelerated again in 2016 to 2.7 per cent from 3.2 per cent in 2015 and 4.6 per cent in 2014.
"This relative slowdown is likely to extend into 2017, followed by a gradual recovery in 2018-2020."
Supporting the non-oil economy's growth will be government spending - after two years of spending cuts, we expect consolidated government spending to increase in 2017. 
"In Dubai, megaprojects will continue to support non-residential construction activity, which will accelerate in the years leading to the 2020 World Expo. The recovery in sentiment is illustrated by the Purchasing Managers Index (PMI), which has bounced back to 56.2 in April 2017 from 52.8 one year ago, although it dropped again to 54.3 in May 2017," Moody's said.
The UAE's re-exports and non-oil exports grew 3.7 per cent in 2016 after retracting by 0.9% in 2015. Trade benefitted from lifted Iran sanctions. Passenger traffic at Dubai and Abu Dhabi's international airports grew to a combined 108.3 million in 2016, up 6.8 per cent over 2015, with a diversified customer base. In Dubai alone, exports grew by 10.6 per cent, passenger traffic at Dubai airport by 7.4 per cent and the number of hotel guests increased 4.9 per cent.  
Moody's views the recovery in real estate market as supportive of the UAE's growth outlook. In addition, Moody's believes that non-residential construction related to World Expo 2020 will further contribute to economic growth.
Drop in oil prices has led to fiscal deficits on a consolidated basis. Moody's expects that further fiscal improvements in Abu Dhabi will support a return to a surplus at the UAE level by 2019. 
Abu Dhabi has recorded large fiscal surpluses averaging 13 per cent of GDP over the five years leading up to the 2014-2015 oil price slump, and the resultant build-up of financial assets is an important underpinning of the UAE's Aa2 rating, Moody's said. As a result of spending measures and some recovery in oil prices, Moody's expects the UAE's consolidated government deficit to come down in 2017, to 1.9 per cent of GDP.
Analysts at Bank of America Merrill Lynch said after weathering the turbulence caused by low oil prices, the UAE has managed a soft landing with non-oil real gross domestic product growth bottoming out as the fiscal drag eased and infrastructure activity picked up.
"We expect overall UAE real GDP growth of 0.9 per cent in 2017, from 2.2 per cent likely in 2016. The headline figure masks a likely contraction in the oil sector due to the Opec deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017 from 2.3 per cent in 2016," said Jean Michel-Saliba, economist at Bank of America Merrill Lynch.
The Washington-based Institute of International Finance (IIF) expects the UAE's non-oil activity to pick up modestly in 2017 as fiscal drag eases and consumption spending rises in the second half of 2017, ahead of the introduction of value-added tax in 2018.
Garbis Iradian, chief economist, for Africa and the Middle East at the IIF, said after a challenging year, "we expect the drag from fiscal consolidation to ease and non-hydrocarbon growth to pick up slightly to 2.9 per cent, from 2.3 per cent in 2016". - issacjohn@khaleejtimes.com