UAE GDP to grow 4.5pc

DUBAI — Prospects of high oil prices and large number of infrastructure projects under way in the UAE is expected to keep up the tempo of economic boom throughout the second half of 2005, while the country is expected to move on a high growth trajectory for the next two years, according to a recent forecast by Business Monitor International (BMI).

By Babu Das Augustine

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Published: Sat 16 Jul 2005, 10:48 AM

Last updated: Thu 2 Apr 2015, 4:41 PM

The BMI forecast projects the real GDP of the country to grow by 4.5 per cent in 2005 against 4.8 per cent last year. However, for next two years the country's GDP is projected to grow more than 4 per cent.

“We have revised the oil prices forecasts upwards this quarter — to $4 1/litre, for the Opec basket in 2005 and $30 billion in 2006 and 2007. Moreover, despite the change, there remains significant upside risk, especially in the latter part of the forecast period. Given that the changes are primarily due to unexpectedly strong demand growth (principally from China, India and the US), rather than supply disruptions; the change is especially positive for the UAE,” said the latest BMI forecast on UAE economy. While the oil prices are projected to remain high, BMI analysts expect the multiplier effects of oil revenue to filter through the UAE economy in general. “Higher revenue for oil companies is likely to result in higher investment in the sector and, most likely, increased wage bills, as companies expand production and reward workers. Essentially, private sector investment and consumption are likely to grow. And more directly, higher oil revenues will lead to higher fiscal revenue for the government. While the UAE has a better reputation than many of its Gulf peers for fiscal prudence, we anticipate that government spending, most likely on infrastructure projects will grow.”

Higher oil revenues across the region are expected to result in increased capital inflows from other Gulf states, as investors seek new opportunities. The most likely result will be continued growth of equity values — which itself may have a 'wealth' effect on domestic consumption as local investors raise spending on the back of paper profits — and the construction sector, both of which have benefited from increased spending over recent years.

Last year, UAE crude production averaged around 2.5 million b/d, averaging $33.50 a barrel. Estimated oil export earnings of more than $3Obn in 2004 — nearly double the level two years earlier — has allowed liquidity to spread throughout the economy and drive the real estate expansion.

The planned new capacity additions will substantially increase the 2.6 million b/d oil production capability, realising Abu Dhabi's ambition of reaching a sustainable output level of 3 million b/d.

Around 200,000 b/d of new production will come through development of the offshore upper Zakum field, currently producing 550,000 bId. US oil giant ExxonMobil was selected in early April by Abu Dhabi's SPC to conduct final negotiations on the field.

For the medium term the outlook is encouraging, however on the long term prospects of the economy, BMI analysts are concerned about the danger of an investment bubble forming in both equities and construction, as company valuations rise faster than profits and capital gets directed to projects where returns are less secure.

While the study does not anticipate a crash any time soon, it notes that the key challenge for the government over the medium term will be to manage this success through effective regulation of financial market to save it from over leveraging and speculation.

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