Oil slump unlikely to result in spending cuts

Dubai: Despite a contraction in oil revenues in the first half of 2019, economists expect the sizeable fiscal consolidation of the last three years to put the fiscal stance on a more sustainable footing in the medium term.

The UAE’s oil export income this year is set to fall from 2018 levels, due to lower oil prices and output, and the decline will be reflected in key economic indicators that include fiscal and current account balances. Analysts see the UAE’s consolidated fiscal surplus moderating in 2019 to just above the balanced level, though a contained deficit is likely in 2020.

“We see the UAE’s consolidated fiscal surplus moderating in 2019 to just above the balanced level, though a contained deficit is likely in 2020,” said Monica Malik, chief economist of ADCB. “We do not expect to see any changes in the government’s fiscal policy in 2019 despite the weaker oil revenue outlook, with the focus remaining on providing support to the economy — a more expansionary spending stance and reductions in government fees.”

The Institute of International Finance (IIF) expects hydrocarbon (oil and natural gas) real GDP to grow by 2.1 per cent despite the likely cut in crude oil production starting this month. The UAE will reduce output by 90,000 barrels a day from the high levels reached in October 2018.

“Exploration activity and high investment by Adnoc [the Abu Dhabi National Oil Company] in the energy sector will continue unabated by the decline in global oil prices,” said Garbis Iradian, IIF chief economist for the Mena region.

The Supreme Petroleum Council recently approved more than $130 billion (Dh477.49 billion) in oil and gas projects over the next five years.

Adnoc is also working on a plan to ramp up its oil production capacity from a targeted 3.5 million barrels a day at the end of 2018 to 4 million barrels per day in 2020. The oil company has also announced plans to develop gasfields with the objective of becoming a net exporter.

‘Weak multipliers’

These projects are widely expected to support the country’s overall GDP growth. However, these investments are likely to have relatively a low impact on non-oil activities.

“Hydrocarbon investments tend to have weaker multipliers in the non-oil economy [labour, credit, etc] and household consumption should remain lacklustre with a weak labour market, though the drag from the introduction of VAT [value-added tax] should fade,” Malik said.

While the 2019 budgets of Abu Dhabi, Dubai and Sharjah were expansionary in terms of government spending, the governments of individual emirates have taken measures to support the private sector.

At a federal level, analysts said a power tariff cut for the industry could lower costs by about 30 per cent, depending on factory size. A new low-cost worker insurance scheme is expected to release Dh14 billion to corporates that were required to keep a mandatory deposit of Dh3,000 per employee.

Other broader reform measures such as the 100 per cent foreign ownership law that is expected to be unveiled early 2019, and relaxed immigration rules for highly skilled expatriates and retirees are expected to improve foreign direct investment.

“We think these measures signal the government’s recognition that the UAE is competing globally for human and financial capital,” said Bilal Khan, a senior economist at Standard Chartered.