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What will help UAE economy rebound?

July 26, 2017 3:43 pm


The UAE is benefitting more from the rebound in world trade flows and growth in global tourism than other GCC economies, according to a new report.

The report ‘Economic Insight: Middle East Q2 2017’, produced by Oxford Economics for the accountancy and finance body Institute of Chartered Accountants in England and Wales (ICAEW) says the UAE has a more favourable economic outlook because it is the most diversified economy in the GCC. Fuel generates just 22 per cent of the country’s export revenues.

The International Monetary Fund (IMF) lowered earlier this month its growth forecast for the UAE for this year and 2018, as low oil prices continue to impact the economy.

The fund’s World Economic Outlook has projected that economic growth in the Middle East & North Africa region including GCC, Afghanistan and Pakistan will slow considerably in 2017, reflecting primarily a slowdown in activity in oil exporters, before recovering in 2018.

The  ICAEW report anticipates UAE’s GDP growth to reach 1.7 per cent in 2017. Although the growth rate is almost half as fast as in 2016, it is represented by a greater contribution from the non-oil sector, which means GDP growth could accelerate to 3.3 per cent in 2018.

Infrastructure investments

The UAE’s infrastructure investments have helped unlock this growth potential. Dubai International Airport is ranked the world’s third-busiest airport and DP World is the ninth-busiest container port globally.

Passenger traffic through Dubai International Airport increased 7.4 per cent in the first quarter of the year, and this improvement is mirrored in the wider non-oil sector.

Several key infrastructure projects are forging ahead, partly in support of Expo 2020 (the first to be held in the Middle East region), but also more widely driven by the ongoing expansion of trade and transport links. Overall, the number of construction projects awarded in Q1 2017 was up 26 per cent compared to Q1 2016.

Business investment has also been supported by an improving financial environment. The stabilisation in oil prices, the easing pace of austerity, and sovereign debt issuance have all helped ease liquidity pressures in the banking system over the course of the past year or so.

Privately-held bank deposits were up by almost 9 per cent in the year to March, enabling lending to grow by 7 per cent over the same period.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “The UAE is in a stronger position than other countries in the region due to its diversified economy, excellent infrastructure, political stability and ample foreign assets. Its reputation as a trade hub has helped the country to benefit from the rebound in the world economy more immediately than other economies in the GCC.”

Spending to drop?

However, the report says that UAE consumers will feel several drags on their spending power in the coming year or two. The introduction of VAT is expected to add 2 percentage points to inflation in 2018, pushing inflation to 4 per cent overall.

Further pressure will be felt by consumers as a result of recent government legislation to enable excise duties on soft drinks and tobacco of up to 100 per cent of the product value. Additionally, new regulations requiring all expats and dependents to hold health insurance in order to renew visas, will take a further chunk out of households’ spending power.

Other GCC countries must increase their non-oil revenues

According to the report, GDP growth across the GCC region as a whole will ease to just short of 1 per cent in 2017. Even though non-oil sector growth is likely to reach 2.6 per cent this year, it will be offset by a further 3 per cent contraction in the oil-producing sectors.

This underscores the need for governments across the region to increase their non-oil revenues, in order to offset longer oil production cuts and modest oil prices.

Although the broad-based pick up in the world economy is providing a useful tailwind to some GCC economies, others are likely to benefit far less from this rebound due to a range of structural reasons.

The three main limitations are: heavy reliance on commodity exports and low non-oil exports; the strengthening US dollar in a longer-term context which undermines the export competitiveness of dollar-pegged economies; and a lack of readiness (with the exception of the UAE) to operate as key east-west trading hubs.

The principle mechanism through which the region’s economies might expect to benefit from faster trade and overall growth would be through the more traditional channel of the impact on oil demand and prices.

According to the report, OPEC’s decision to extend its current production cuts from July 2017 to March 2018 failed to have much impact on oil prices through May and June – partly because compliance outside the GCC is likely to be patchy, and because any rebound in oil prices will bring more output back onstream in the US.

“We expect oil prices to remain close to $45bbl through most of 2017, creeping up through $55bbl by late 2019 as spare capacity in the world market is closed.”

Outlook

However, the 2018 outlook is likely to be more positive. Oil output is expected to rise 1 per cent complementing momentum in the non-oil sector (which is expected to grow by 4 per cent) resulting in overall GDP growth of 2.7 per cent. The report does warn, however, that any further oil price weakness or escalation of tensions between Qatar and other GCC economies, would clearly pose a downside risk to growth.

Tom Rogers, ICAEW Economic Advisor and Associate Director of Oxford Economics said: “GCC countries have to step up their efforts and increase non-oil revenues. The introduction of VAT next year is a start but it’s not enough, other measures should be taken to maintain financial steadiness. These measures should be considered as part of broader economic diversification strategies.”

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By AMEinfo Staff
AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.



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