Complex Made Simple

Here’s why UAE’s economic output’s upbeat. Oil a spoiler?

Today’s  S&P Global Ratings report places emphasis on increased debt servicing for regional countries and projects that a decline in oil prices to near $55 a barrel would put additional pressures on the funding needs of GCC countries, and spur additional borrowing.

However, UAE’s economic picture is rosier than expected.

Jameel Ahmad, Global Head of Currency Strategy & Market Research comments on the UAE economy output, saying: “The news that the UAE economy is expecting a significant increase of economic output next year at 4.2% from the projection of 2.8% for 2018 at a time where many economic forecasts around the world are being revised lower due to numerous global uncertainties is a credit to the UAE.

“One advantage that the UAE has over several of its global emerging market peers is less exposure to financial market fluctuations due to its peg against the Dollar and the impact this can have on economic expectations.”

What will be interesting to monitor moving forward is whether the upbeat UAE forecasts could tempt investors to invest in domestic equity markets as a result of increased economic confidence over this positive news.

Read Executives across region optimistic despite rollercoaster year

UAE’s performance on high

Government deposits in UAE-based banks hit an all-time-high of AED286 billion ($77.8 bn) at the end of September 2018, the country’s Central Bank said on Tuesday, rising by AED74 bn ($20bn) in the first 9 months, as reported by national news agency WAM.

Growth was attributed to rising oil prices, which grew by 35% during the past 12 months..

Government fiscal surpluses since the beginning of the year amounted to AED186 billion ($50.7), according to the Ministry of Finance statistics.

Figures from Dubai Customs on Tuesday said the city’s external non-oil trade for the first nine months of 2018 reached AED965.3 billion ($262.8 billion).

Re-exports registered 13% growth to touch $81.5 bn, while imports reached $161.3 bn, and exports $26.6bn.

In a statement, Dubai Customs said: “The trade performance reflects the success of government policies and initiatives and strategic sustainability development plans to support the growth of various economic sectors”.

Read Saudi Arabia PMI: New business growth improves during October

GCC picture sketchy

Funding needs in the Gulf Cooperation Council (GCC) region are accumulating at a slower pace thanks to higher oil prices and government policy responses, but remain high for 2018-2021, says S&P Global Ratings in a report published today.

“GCC sovereigns’ combined central government deficit has improved significantly, and we estimate it at around $75 billion in 2019 (5.5% of combined GDP).

“However, we expect fiscal imbalances will persist and for the average deficit to widen slightly to nearly 6% over the forecast period,” said S&P Global.

 “GCC governments’ net debt positions have significantly deteriorated since oil prices fell in 2015 and debt service now accounts for a much larger proportion of fiscal revenue. Barring any significant fiscal consolidation or a sharp rise in oil prices, we do not expect this situation to reverse.”

S&P said it assumes oil prices will decline to $55/bbl by 2021, curtailing government deficit reduction.

Read: Salaries to increase by 4.8% in the UAE in 2019

“We expect the average GCC fiscal deficit will widen slightly over the forecast period to around 6% of GDP (from 5.5% in 2018), driving the $300 billion financing requirement,” it said.

Falling oil prices and higher spending will likely offset planned revenue-raising measures.

“We forecast GCC central government balances to remain in deficit until at least 2021. We estimate previous funding needs in 2015-2017 were $450 billion (or 12% of combined GDP), compared with an expected $300 billion over 2018-2021 (5% of GDP), and that total funding requirements over 2015-2021 will come to around $750 billion.”

On average, S&P expects a 70:30 financing split between debt and assets over 2018-2021, with Qatar and Bahrain financing almost exclusively with debt and Kuwait and Abu Dhabi relying more on assets.

“However, apart from Oman and Bahrain, GCC governments still have an exceptionally high level of government liquid assets at their disposal,” said S&P.