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UAE Can Maintain Fiscal Surplus at $23 Oil

DUBAI - UAE will be able to tide over the the global economic melt-down as the country is well-positioned to maintain fiscal surplus in 2008 and 2009 since it has the lowest “break-even oil price” in the GCC of $23 (Dh84.48) per barrel against the IMF’s baseline petroleum price projection of $68 per barrel for 2009, a report by Abu Dhabi Commercial Bank (ADCB) said.

The report said UAE’s debt has been backed by foreign asset reserves that leaves the country’s capacity unimpaired. The bank added that the recent central bank’s measures to inject liquidity in the local financial market were merely precautionary and that the underlying financial system is sound.

In a recent study, EFG-Hermes Holding said the UAE needed to earn only $32.40 per barrel to balance its budget. According to the study, while Saudi Arabia can maintain the current level of budget spending even if the oil price will fall to $36 per barrel, Kuwait needs $75 per barrel mainly due to the one off budget transfer of $20 billion to capitalise the social security system.

The Institute of International Finance (IIF), a Washington-based association, said in its latest study that GCC economies would see a decline in growth to 3.6 per cent next year from 5.7 per cent in 2008 on lower oil prices. But it expected oil prices to average $56 per barrel next year and said the “break-even” price for the UAE is $36 per barrel. The report found that growth in the non-hydrocarbon sector outpaced hydrocarbon growth in every country except Qatar.

The ADCB report said the corporate fundamentals in the UAE remained largely intact but overlooked. “The banking sector achieved considerable growth between 2004 and 2007, as measured by all key banking parameters with loans up 39.7 per cent, deposits 32.1 per cent, and profitability 38.4 per cent, due to a highly supportive macro-economic environment.”

It said despite the current challenges the severity of crisis in the UAE was far less than in the Western countries. As IMF estimates that slowdown in the UAE’s growth only represents a transition from an expected growth of seven per cent in 2009 to a revised expected growth of six per cent.

The bank said that corporate fundamentals in the UAE remained largely intact but overlooked. “The UAE penetration rate — the ratio of bank assets to GDP — of 172.9pc (2007) is lower than the average penetration rate enjoyed by developed countries, emphasising the sector’s substantial growth opportunities. The report noted that the banking sector would greatly benefit from the country’s conducive macro-economic environment to sustain future growth. “Around $360 billion worth of real estate, tourism, manufacturing and oil-related investment projects by Dubai and Abu Dhabi in the medium term and low interest rate due to the dollar peg would stimulate credit growth and mitigate other bear factors.” “Consolidation will occur due to increased competition from foreign banks once trade barriers are lifted. International expansion will permit banks to diversify their current concentration away from the UAE economy. With the UAE Islamic banking sector growing more rapidly than conventional banks, we expect its market share to increase from 15pc to 25pc over the next three to five years,” the bank said.

· issacjohn@khaleejtimes.com