The UAE stands out among its GCC peers as best equipped to cope with potentially prolonged weakness in oil prices given its diversified economy and solid buffers, Barclays said.
The impact of falling oil prices on the UAE's external and fiscal positions is likely to remain manageable with the current account surplus to remain at 12.3 per cent and 6.8 per cent of the country's gross domestic product respectively, in 2014 and 2015, the bank said in an analytical study.
The diversification of the economy and the composition of its resource base have allowed the UAE to keep its external breakeven oil price around $64 per barrel, based on exports of 2.6 mbpd in 2014, while its fiscal breakeven oil price has fallen from $93/bbl to $79/bbl over the past three years, it said
"In other words, and assuming UAE's oil export volumes over 2014/2015 remain constant, we estimate that the country will still enjoy a large current account surplus as long as the average oil price remains above $64/bbl.”
Barclays said in its Economic Research report that the ongoing official efforts to diversify the UAE's economic structure and encourage the expansion of the non-hydrocarbon sectors have seen the share of the non-hydrocarbon sector increase substantially.
Barclays analyst Alia Moubayed observed in the report that the renewed possibility of a prolonged period of low oil prices highlights the key challenges posed by the limited progress on diversification of export and fiscal revenue bases in many GCC countries, and their vulnerabilities to extreme oil price volatility. "Among those countries, we think the UAE stands out as the best equipped to face oil price headwinds and is the most capable of adapting to the structural changes in the global oil markets.”
The banking sector liquidity may be affected, but loan deposit ratio (LDR) is below 100 per cent, while sovereign support and continued deleveraging in the corporate sector should help.
The share of the non-hydrocarbon sector in the UAE increased from 44.7 per cent of the gross domestic product (GDP) in 2000 to 61.1 per cent of GDP in 2013. Diversification efforts have also contributed to containing the role of the public sector in driving non-oil GDP growth. After rising sharply in 2009 to 30.6 per cent of non-oil GDP, the share of public-sector consumption and investment in total non-oil GDP fell back to 25.3 per cent by 2013. This compares with 56.6 per cent of non-oil GDP in Saudi Arabia and underscores the reduced role of the public sector in steering UAE's economic activity, although it remains important, said the report.
"This reduced reliance on oil revenues is reflected in the increasing share of non-hydrocarbon in the UAE's exports and fiscal revenues. This is partly explained by the growing share of investment income earned on net foreign assets, as well as the rapid expansion in non-oil exports of goods and services, notably from Dubai,” it said.
On the fiscal front, Barclays expects the Abu Dhabi government to slow its expenditure growth through announced subsidy cuts and the review of some investment projects and possibly revisit and scale back its generous aid to neighbouring countries. "This would allow the UAE's consolidated budget to maintain a modest fiscal surplus of 6.1 per cent and 5.4 per cent of GDP in 2014 and 2015 respectively.”
The report said the UAE's fiscal capacity has been bolstered and its financial buffers strengthened significantly. The accumulation of large external and fiscal surpluses over the past decade and strategic management of its net foreign assets helped to increase foreign exchange reserves at the central bank and expand the asset base of Abu Dhabi's Sovereign Wealth Fund (ADIA) to almost 120 per cent of the UAE's GDP.
"UAE's overall public debt remains low at less than 12 per cent of GDP providing ample fiscal space if necessary to meet additional financing needs. Banking liquidity will likely to support growth despite falling oil prices. Recent improvements in the performance of the banking sector supports our view on the likely limited impact of lower oil prices on the UAE economy. The latest available data reported by Moody's highlight slight improvement in the banks' profitability on the back of higher asset growth and more moderate pace of provisioning,” said Barclays.
Source: Khaleej Times