New projects to lift UAE growth

After weathering the turbulence caused by low oil prices, the UAE has managed a soft landing with non-oil real gross domestic product growth bottoming out as the fiscal drag eased and infrastructure activity picked up, analysts at Bank of America Merrill Lynch said.

"We expect overall UAE real GDP growth of 0.9 per cent in 2017, from 2.2 per cent likely in 2016. The headline figure masks a likely contraction in the oil sector due to the Opec deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017 from 2.3 per cent in 2016," said Jean Michel-Saliba, economist at Bank of America Merrill Lynch.

Over the medium-term, BofAML expects UAE non-oil growth to increase to three to 3.5 per cent on the back of greater Expo 2020 projects. After averaging 10 per cent annual growth from 2000-10 and a slump in 2009, Dubai real GDP growth was 4.1 per cent in 2015, slowing to 2.5 per cent in first three quarters of 2016, BofAML said in its Macro Monthly report.

The Washington-based Institute of International Finance (IIF) expects the UAE's non-oil activity to pick up modestly in 2017 as fiscal drag eases and consumption spending rises in the second half of 2017, ahead of the introduction of value-added tax in 2018.

Garbis Iradian, chief economist, for Africa and the Middle East at the IIF, said after a challenging year, "we expect the drag from fiscal consolidation to ease and non-hydrocarbon growth to pick up slightly to 2.9 per cent, from 2.3 per cent in 2016".

The BofAML report noted that the supportive external financing backdrop and improved domestic liquidity support refinancing of Dubai government-related entities. Aggregate Dubai public sector debt appears to have stabilised in nominal terms, although it remains at elevated levels, said the report.

"Over time, we expect greater market differentiation for Abu Dhabi versus other GCC credits as its high-grade high-quality value is cemented. Scarcity value, the ability to post budget surpluses at $50/bbl and the lack of external issuance going forward should support and tighten spreads, especially versus GCC peers such as Qatar," said Michel-Saliba. According to BofAML, the Dubai government is likely to record a small budget surplus in 2016. "Still, we expect the fiscal balance to shift to modest deficits [one to two per cent GDP] from 2017 onwards as capex associated with the new airport, new Metro lines and Expo 2020 come on line."

The report observed that Dubai's 2017 budget projects a deficit of $0.6 billion (0.6 per cent of GDP) but "we think the presentation excludes interest payments on the Emirates NBD loan. We thus expect external debt issuance to pick up consequently". Growth remains broad based although the construction sector is the laggard. The fastest growing sectors are restaurants and hotels, electricity, gas and water, transport and real estate.

The key sectors in real GDP are whole and retail trade (30 per cent of real GDP), real estate and construction (a combined 22 per cent), transport and communication (15 per cent), finance (12 per cent) and manufacturing (12 per cent), the report noted.

"In Abu Dhabi, fiscal consolidation has slowed down non-oil real GDP growth materially, but we expect the drag to fade. Real GDP grew by 2.8 per cent in 2016, from five per cent in 2015. Non-oil real GDP growth slowed to just 2.8 per cent in 2016, from 8.6 per cent in 2014," it said.

Over the next five years to 2022, Abu Dhabi authorities are planning to anchor spending at a flat level of Dh250 billion and target revenues (including some investment income from the Abu Dhabi Investment Authority) increasing through the passage of a value added tax, crude oil production increases (as Abu Dhabi National Oil Company targets capacity at four million bpd by 2022) and oil stabilising at $50/bbl, the bank said in its report.