Low oil prices are eroding fiscal and external surpluses of oil exporters in the Middle East, but the UAE economy, underpinned by large public foreign assets and robust diversification, will be relatively resilient, the Institute of International Finance (IIF) said in a report on Sunday.
According to the Washington-based global body of the financial industry, other factors helping to better position the UAE include significant fiscal consolidation, modest fiscal deficit and the country's safe haven status.
Dr Garbis Iradian, chief economist for Middle East and North Africa at the IIF, said growth in the UAE will moderate to about three per cent in 2015 and 2016.
"The UAE has led the way for other GCC countries in terms of fiscal adjustments by removing fuel and electricity subsidies. Reductions in energy and electricity subsidies and non-priority spending are leading to a significant decline in government spending, which is expected to decline by four per cent in 2015. While its large current account surplus is projected to decline, it will remain sizeable and the UAE's status as a significant exporter of capital will be maintained," Iradian said at a media briefing.
The UAE's fiscal breakeven price of oil is relatively low at $69/bbl in 2015 and the country is well positioned to benefit from the lifting of sanctions on Iran by serving as a transshipment point for more trade activity, he said.
The IIF said Mena oil exporting countries face difficult challenges as they adjust to the sustained decline in international oil prices.
"The sharp and sustained decline in oil prices makes fiscal adjustment unavoidable," said Iradian.
Weaker growth
Tighter fiscal stances will lead to weaker growth. Non-oil growth in the GCC will also weaken to 2.6 per cent in 2016, from 3.9 per cent in 2015, he pointed out.
"However, ample public foreign assets, in the form of official reserves, may slow the pace of adjustment in the near-term. We expect aggregated government spending to decline by an annual average of two per cent in 2015-2016, as compared to an annual increase of 15.5 per cent from 2004-2014," said Iradian.
The IIF said that banking systems in the Mena region are well positioned to cope with low oil prices in the next few years, although liquidity conditions are tightening and rates are rising. Prolonged low oil prices will likely weaken asset quality and profitability.
The large current account and fiscal surpluses of the region's 10 oil-exporting countries, which peaked at $467 billion in 2012, is projected to drop to a deficit of $76 billion in 2015 from a surplus of $225 billion in 2014.
"Accordingly, we project a shift from resident capital outflows of $215 billion in 2014 to small net inflows of $18 billion in 2015 and 2016. As a consequence, net foreign assets are expected to decline by about $160 billion to $2.5 trillion in 2015, 55 per cent of which is managed by SWFs," the IFF said.
Dr Giyas Gokkent, senior economist for Middle East and North Africa at the IIF, noted that growth in Saudi Arabia, the largest economy in Mena, is expected to decelerate further to 1.4 per cent in 2016. The kingdom faces a large fiscal deficit, equivalent to $135 billion in 2015, which will be financed by liquidating some of its official reserves and by borrowing from local banks, which are highly liquid.
For the region's oil importers, the drop in oil prices and non-fuel commodity prices is providing more space for supportive fiscal and monetary policies, the IIF said.
