Huge reserves spending cuts underpin UAE fiscal position

(MENAFN- Khaleej Times) The UAE's fiscal position remains strong given huge reserves and the political and economic flexibility to reduce spending an economic outlook report by Business Monitor International said.

"The UAE economy will prove to be resilient to lower oil prices and its growth outlook is positive and well-balanced. On an emirate level we are most bullish about Dubai particularly its real estate" said a report by BMI Research a Fitch Group Company.

The non-oil economy will be the main growth driver with Dubai outperforming on an emirate level it said. "Non-oil sector expansion in Abu Dhabi will remain robust but the hydrocarbon sector will weigh on growth as we forecast Opec oil prices to average $55/bbl and $54/bbl in 2016 and 2017 respectively from above $100/bbl in the past three years" BMI said.

Over the coming quarters the country's economic growth will slow given lower oil prices however growth rates will still be impressive with over 40 per cent of GDP contribution coming form services sector.

"We forecast real GDP growth of 3.4 per cent in 2016 and three per cent in 2017 from an estimated four per cent in 2015" said the forecast.

BMI's outlook for the UAE is in line with an economic update issued by Abu Dhabi Commercial Bank which argued that with a diversified economy and strong foreign reserve position makes the Emirates one of the best-positioned countries to withstand the low oil price environment.

ADCB forecast said that the UAE would not be immune to the slowdown in wider GCC non-oil GDP growth being affected via consumption/tourism capital flows and trade or the lacklustre global growth backdrop.

"Moreover we expect a substantially softer landing for the economy than in 2009 when the correction of asset price bubbles resulted in a contraction in real non-oil GDP growth. Nevertheless we still see economic challenges increasing in 2016 with the further fall in the oil price" ADCB said.

Analysts at BMI said even with the decline in oil revenues they expected the UAE's model of government-driven development plans to broadly continue. The federal government has made fiscal consolidation a priority over the past two years --- efforts that have somewhat cushioned the impact of much lower oil prices. In addition necessary reductions in fuel subsidies and the possibility of the introduction of a Value Added Tax bode well for further improvements on the fiscal front. "While the government will fall into a sustained fiscal deficit the UAE has the financial arsenal and the political necessity to continue spending in part indicated by theelevated levels of foreign reserves" BMI report said.

BMI noted that foreign investor ownership in UAE real estate sector has grown revealing a more tolerant UAE in which domestic players have previously dominated the market. "We opine that commercial real estate should see stability in rentals across the board with marginal rental rise in premium units for office and retail as a result of the growing demand limited supply and inconsistent pipeline."

The report predicted that the office sector should witness falling vacancy rates in key business districts within Abu Dhabi and Dubaiwith rentals subsequently rising for premium builds due to a lack of available units.

In the retail sector growing tourism contributing around Dh130 billion to the economy over 2015 rising household spending and developing real wages will benefit the retail sub-sector over 2016.

"We expect to see an increase in demand for large-scale luxury units such as malls which have become significantly more popular acrossthe region" it said.

The BMI report noted that demand for larger warehousing from retailers and fashion brands will see opportunity for development in the industrial sub-sector. Strong business and consumer confidence support growth opportunity within the retail and office sub-sectors.