Strong fiscal buffers help UAE weather low oil price storm

dubai - Non-oil sector firms benefit from solid domestic demand

The UAE's economy has weathered the storm of low oil prices better than its GCC neighbours thanks to a relatively diversified economy and significant fiscal buffers, economists and analysts said.

The UAE's economy remains in fairly good shape, with the purchasing managers' index (PMI) staying firmly in expansionary territory so far this year as non-oil sector firms benefit from solid domestic demand, while the number of tourist arrivals increased significantly despite a stronger dirham, analysts at FocusEconomics said.

The relative ease of doing business in the UAE is a major draw for foreign investors, with the Emirates rising five places to 10th in the latest World Competiveness Ranking.

"However, these strengths did not stop growth from dropping last year as a result of fiscal consolidation and depressed hydrocarbon exports. On the political front, although the ongoing diplomatic spat with Qatar has disrupted trade and finance flows. For domestic firms, vital gas supplies remain unaffected," FocusEconomics panelists said.

As the extension to Opec oil production cuts dampens economic activity, the UAE's growth will decelerate further in 2017. However, the panelists predicted the non-oil sector would pick up, thanks to more gradual fiscal consolidation, stronger external demand and greater investment in preparation for the Dubai World Expo 2020. They expect the gross domestic product to rise 2.1 per cent in 2017, down 0.2 percentage points from June's forecast, and 3.4 per cent in 2018.

Echoing the views of FocusEconomics, the executive board of the International Monetary Fund, which recently concluded the Article IV consultation with the UAE, said the second largest Arab economy's financial buffers, safe-haven status, sound banks and diversified and business-friendly economy are helping it cope with the lower oil price shock.

Fiscal consolidation
The IMF said in its report that economic activity is expected to strengthen gradually in the coming years with firming oil prices and other global indicators and an easing pace of fiscal consolidation. Non-oil growth is projected to rise to 3.3 per cent in 2017 from 2.7 per cent in 2016, reflecting increased domestic public investment and a pick-up in global trade.

The IMF experts observed that over the medium term, non-oil growth is expected to remain above three per cent, supported by accelerating investment in the run-up to the Expo 2020. The planned value added tax introduction in 2018 is not expected to have a significant adverse impact on growth, they said.

The IMF said a moderate current account gap is expected to close over time as fiscal savings rise to the level consistent with intergenerational equity. "The authorities' efforts to make the economy more productive are key to alleviating the impact of the oil shock on medium-term growth prospects."

"The key policy goal is to foster economic adjustment to the new oil market realities," they said.

"To foster the adjustment, especially given downside risks, the momentum in fiscal reforms needs to be sustained and coordinated with structural reforms," the IMF said. "Complementing recent significant subsidy reforms, a timely introduction of the VAT and excises would be another major achievement to diversify revenues away from oil."

Ongoing initiatives to upgrade the supervisory and regulatory framework for the financial sector are welcome and need to continue, they said.

- issacjohn@khaleejtimes.com