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UAE’s economy strengthens

Rising oil prices and growing public and private sector project activity are expected to boost the economic growth of the emirate, forecasts a report

March 2017

Project activity in the United Arab Emirates (UAE) is forecast to recover in 2017 after a difficult 2016 on the back of a strong recovery in economic growth, according to a new report from Middle East business intelligence service Meed.

Meed’s annual UAE Outlook Report for 2016 said that a recovery in oil prices combined with growing public and private sector activity boosted by Dubai’s preparations for the Expo 2020 will see real GDP growth rise to between 4-5 per cent a year from 2017- 2020, compared with about 3.1 per cent growth in 2016.

While acknowledging that many uncertainties remain that could derail an anticipated recovery in oil prices, the report said that a recovery in oil prices coupled with a modest increase in UAE oil production in 2017 will be supported by a recovery in non-oil activity connected with intensifying investment ahead of Expo 2020, and growing trade with Iran following the lifting of nuclear-related international sanctions.

 

PROJECTS REBOUND

The recovery is expected to support an increase in major project spending in the emirates after a year of flat growth in 2016 stunted by cutbacks in government spending and a review of oil and gas and infrastructure projects in Abu Dhabi.

The report said that about $155 billion worth of major projects were under execution in the UAE at the mid-point of 2016 and it identifies a project pipeline of about $629 billion worth of major projects that are planned in the UAE but not underway as of mid-2016.

About $22.6 billion worth of project contracts have been awarded in the UAE in the first half of 2016, largely driven by real estate, transport and power projects in Dubai, which account for about $16 billion worth of awards.

Meed forecasts that about $37 billion of awards will be made in the UAE in 2016, a similar level to 2015.

From 2006-2015, the UAE awarded an estimated total of $507 billion worth of projects, representing about 35 per cent of the total value of contract awards in the GCC in that period.

Dafza aerial view

Dafza aerial view

The largest sectors for future projects are construction, followed by transport. In addition to Abu Dhabi’s metro and light rail plans, there is the expansion of Al-Maktoum International airport and further phases of Etihad Rail’s federal railway to execute.

 

FISCAL PRESSURE

The UAE, one of the world’s largest exporters of oil, is solvent and creditworthy with at least $500 billion-worth of public and private savings.

Its economy is increasingly diversified and supports large and experienced corporations active in regional and global markets. The banking system is solvent, liquid and well-managed.

However, the report highlights the unprecedented fiscal challenges facing the UAE as a result of the sharp and sustained fall in the oil price since the summer of 2014.

The UAE economy, it says, will contract significantly in current terms in line with the oil price in 2016. As a result of lower oil export revenues, the consolidated UAE government will record a budget deficit and its historically substantial current account surplus will be eliminated.

These changes are raising profound questions about the way the UAE’s economy is governed and encouraging new approaches to economic and financial management.

This includes: increasing the efficiency and effectiveness of the governments of the federation and of individual emirates; acting to end or reduce energy and other subsidies; and preparing for the introduction of VAT and other forms of taxation for the first time to increase public sector revenue.

 

RISKS REMAIN

The main risk associated with the forecast made in this report is a failure of the projected oil price increases to materialise. This will intensify the challenges facing the government of the federation and individual emirates, but the UAE has the resources to deal with the financing requirements the low price scenario presents.

The main issue in these circumstances will be the impact low oil prices and reduced government income will have on the economies of the five poorer emirates and Dubai, the most heavily indebted of the seven, and in turn the projects market

Meed’s forecast for the UAE economy in 2017 is based on the following assumptions:

• Average price of UAE oil exports will be $37 a barrel in 2016, rising to $50 in 2017 and increasing by 10 per cent a year to 2020;

• Opec will continue to pursue the market-share strategy it adopted in 2014. Thereafter, prices will be lifted by administrative measures and a tightening demand/supply balance due to consumption being stimulated by lower prices and high-cost output being removed from the market;

• The UAE will produce an average of 2.8 million barrels per day in 2016 and output will grow by 1.5 per cent a year in line with oil demand to 2020; and

• Non-oil economic activity will stagnate in 2016 and then continue to grow in line with the trend seen in the past 10 years in 2017-20.




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