Higher oil prices will boost government spending | Higher oil prices will boost government spending -

Higher oil prices will boost government spending

United Arab Emirates: Wednesday, December 30 - 2009 @ 14:12

Supported by fiscal and monetary policy, as well as a range of government legislative intervention, the global economy is showing signs of recovery.

The study revealed that a combination of US Dollar depreciation, increasing equity prices, improvements in demand on the back of increased market sentiment and risk appetite have lifted crude oil prices significantly since its trough of $34 p/b in February 2009.

Challenging 2009 but Promising 2010 for UAE’s Oil Sector

Crude oil prices are an overriding concern especially for a resource abundant country like the UAE, accounting for 37.0% of the share of GDP in 2008. It is clear that the onset of the economic slowdown in the UAE as well as with the collapse in crude prices witnessed in the first half of this year, both oil and non-oil GDP growth are expected to fall in 2009 relative to previous prosperous years. That said, given the more optimistic outlook since the summer months, both oil and non-oil growth are forecast to rise next year.

In addition, in the recent past, the relationship between crude oil prices and GDP growth has been relatively strongly correlated. However, with the government’s initiative to diversify the economy away from the hydrocarbons sector, this correlation has weakened somewhat as non-oil GDP takes centre stage.

On the back of the UAE’s decision to maintain production levels around 2.25 million barrels per day, in line with other OPEC members, has led to higher crude oil revenues as crude oil prices have risen progressively since the first quarter of this year.

The rapid deterioration of the world economy has meant that the demand for crude oil had fallen dramatically and the majority of the impact, in terms of government revenue, is expected to be felt in 2009. Some commentators have suggested that both the fall in production levels in 2009 relative to last year, on top of a fall in non-oil export earnings on the back of a fall in demand, will cause the current account balance to dip into a minor deficit this year from a large surplus envisaged in 2008.

Having said that, however, the recent improvement in the global economic outlook in the second half of this year has meant that the demand for crude oil has risen noticeably (particularly in emerging countries such as China and India) and is expected to remain high in 2010.

From this, it is expected that government revenues will register strong growth next year on the back of higher oil revenues and this in-turn will be pumped back into the economy through a range of government fiscal measures. Hence, the overall current account balance is expected to record a surplus as the high demand for crude oil drives prices upwards and as a result the UAE is likely to register a strong bounce back in its economic growth level.

HE Eng Hamad Buamim, Director General, Dubai Chamber, maintained that the UAE economy is one of the first in the world to recover from the global financial crisis and with the promising prospects for 2010, especially in light of the expectations of the oil prices rising to $80p/b, indicates that the Government’s handling of the economic situation has strengthened investor confidence and provided the much-needed boost to the overall economy.

Oil Outlook for the UAE Economy

Most of the observers expect a rise in world demand for crude oil next year and hence prices. If this turns to be correct forecast, then the UAE government will continue to remain in a financially strong position going forward. This will aid public investment budgets, particularly in infrastructural projects in 2010. This will come on the top of the easing in accessing financing and increased market sentiment which will clearly put the country back onto the road of economic recovery.

Overall, with crude oil prices now expected to average $60.6 p/b in 2009 and rise further to an average price of $80.1p/b in 2010, the consolidated fiscal accounts for the UAE is projected to remain broadly in balance and as a result, the UAE hydrocarbon receipts should grow steadily in the short-term. A combination of high public expenditure in the past (made possible by high oil revenues) along with the resurgence in oil prices since the first quarter of this year will ally with strong fundamentals and sound fiscal policies to speed up the recovery in the UAE next year.

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Wednesday, December 30- 2009 @ 14:12 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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