UAE budget deficit falls by 26%

Abu Dhabi - 12% jump seen in third-quarter revenues as govt scraps fuel subsidies

The UAE's fiscal balance improved in the second quarter of the year, as the highly successful policy of doing away with petroleum subsidies has been a key contributory factor to greater fiscal stability.
The general government deficit decreased by 26 per cent compared to the first quarter of 2015 as it dropped from a deficit of Dh12.1 billion to a smaller deficit of Dh8.9 billion, says a report issued by the Central Bank of the UAE.
"This improvement is due mainly to the increase in total revenues by 12 per cent, which exceeded the increase in total expenditure by seven per cent," says the report that chronicles the economic performance in the third quarter of 2015. However, in a year-on-year comparison, the revenues dropped in both the first and second quarter by 17 per cent and 14.2 per cent.
The total expenditure drop is in line with fiscal consolidation initiated by the government in 2015, inducing a quarterly year-on-year decrease of total expenditure by 16.4 per cent in the first quarter of 2015 and by 10.2 per cent in the second quarter. Against annual expenditures of Dh411.1 billion, the UAE is to raise budgeted revenues of Dh286.9 billion in the year, leaving a deficit of Dh124.2 billion.
The water, electricity and energy subsidy withdrawal by the Abu Dhabi government in January this year was implemented gradually until the third quarter of 2015, which lowered the total amount of subsidies by more than 93 per cent and 96 per cent during the first and second quarters of 2015, respectively, on a year-on-year analysis. On July 28, the UAE removed the subsidies on petroleum products, when it linked the retail prices with the average international prices during the previous month.
The oil prices plunged triggered in July 2014 from $114 a barrel continued throughout the year to $45.10 a barrel on December 1, when it gained 49 cents a barrel.
In a commentary, Moody's Investors Service said on November 9, that the UAE which is although experiencing a deterioration in its fiscal balances, will return to budget surpluses in 2017 owing to recovering oil prices and a planned increase in production levels. The UAE Minister of Energy Suhail bin Mohammed Faraj Al Mazroui is on record hoping that the oil prices would rise in the year 2016.
"We forecast relatively modest budget deficits in 2015 and 2016, owing to the low oil price environment and given that hydrocarbons remain the backbone of the UAE economy. However, based on our oil price projections that have Brent rising to $73 by 2019 after a modest dip in 2016, the UAE government will record a budget surplus in 2017, with surpluses growing during the rest of the decade," says Steven Hess, senior vice president at Moody's.
"These deficits will not seriously affect the country's strong financial position, given the government's build-up of substantial financial assets over the past decade. Moreover, we expect the hydrocarbon sector to make positive contributions to real growth in 2015-2016 as production volume rises," he adds.
Moody's forecasts are based on the UAE's planned increase in the volume of oil production, with capacity targeted to rise by 30 per cent by 2020. The rating agency projects an upward trend, even if this target is not fully achieved, given that the planned increase is a response to growing domestic demand for processed hydrocarbons that has so far been met with imported gasoline.
"There is a risk that, if oil prices remain lower than we now expect, the UAE's strong fiscal position could be eroded, but it can use the buffers it has built up for the time being," said Hess.
Additionally, Moody's comments that the UAE sets itself apart from regional peers in its successful diversification efforts, moving away from hydrocarbon dependency and growing a competitive service sector. Service industries accounted for 54.9 per cent of nominal GDP in 2014, while the rating agency expects non-residential construction, tourism, trade and financial services to boost economic growth in 2016.
- haseeb@khaleejtimes.com