The UAE has several options both on spending and non-hydrocarbon revenue sides to bolster its fiscal position in a scenario of persistent lower oil prices the Institute of International Finance or IIF said.

Predicting that the consolidated government spending in the UAE including the federal government and the seven individual emirates is expected to decline by 4.5 per cent in 2015 the IIF said additional options for the country include gradually reducing social benefits that account for 12 per cent of total spending while limiting further increases in the wage bill.

At present reductions in energy and electricity subsidies and non-priority spending are leading to a significant decline in government spending the IIF noted in a report.

The Washington-based global body of the financial industry said the introduction of a low-rate VAT (at five per cent) would help the UAE raise new revenues efficiently while helping to strengthen tax administration.

Other options suggested by the IIF include broadening the corporate income tax with lower rates; and introducing a 15 per cent excise tax on cars.

"Moreover ample financial resources [public foreign assets more than 160 per cent of GDP in 2015] and the capacity to issue domestic debt mean that the government will be able to finance modest fiscal deficits over the medium term" said Dr Garbis Iradian chief economist for the Middle East and North Africa at the IIF.

"Even if oil prices fall further to an average of $45 per barrel in 2016 and remain constant in real-term thereafter our projections show that the fiscal situation will continue to be sustainable helped by the current fiscal adjustment which will further lower the fiscal breakeven prices of oil" said Dr Iradian.

Strong fundamentals

He said the spending cut combined with a small increase in the volume of crude oil exports will lower the fiscal breakeven price of oil from $79/bbl in 2014 to $70/bbl this year. Dr Iradian said the large fiscal surpluses of the past five years will swing to a deficit of 4.2 per cent of GDP in 2015.

"While the large current account surpluses are also projected to decline the surplus will remain sizeable and the UAE's status as a significant exporter of capital will be maintained" he said in a report released recently.

He observed that strong macroeconomic fundamentals have helped the UAE to sustain market confidence as evidenced by the low CDS and bond spreads and by the absence of pressure on the currency peg.

"UAE banks should remain strong but prolonged low oil prices may weaken asset quality and profitability. Despite turbulent conditions UAE banks should remain sound in the short term because of their strong initial balance sheets and the expected resilience of the UAE economy" Dr Iradian said.

He noted that banks have continued to post high profits so far this year and have maintained healthy capital adequacy ratios and high provisions on bad loans. "However if real estate prices decline further then the asset quality of banks would deteriorate and profits would be squeezed. Also tighter liquidity conditions will lead to a further rise in interest rates."

The IIF report said low oil prices have led to a drop in hydrocarbon receipts to the public sector (government and government-related entities) which led to a decrease in public deposits in the banking sector. The drop in public deposits amounted to about $15 billion from September 2014 to September 2015. As a result the 12-month growth in total deposits was just one per cent in September.

The report said at the current oil prices the UAE's GDP growth is projected to moderate to three per cent in 2015 and 2016.

"Reductions in energy and electricity subsidies and non-priority spending are leading to a significant decline in government spending. While the UAE's large current account surplus is projected to decline it will remain sizeable and the UAE will remain a net exporter of capital" the IIF said.

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