UAE's public spending up 3% despite oil price slide

(MENAFN- Khaleej Times) Driven by an eight per cent jump in Dubai government spending, the consolidated public spending in the UAE is projected to rise by three per cent in 2015, the Institute of International Finance, or IIF, said on Sunday.

The IIF, a leading global association of close to 500 financial institutions from more than 70 different countries, said while the UAE looks resilient to the drop in oil prices, continued growth in spending, albeit at a slower pace than in recent years, combined with flat oil production, would raise the fiscal breakeven price of oil to $78/bbl.

"As a result, the consolidated fiscal balance will shift from a surplus of 6.7 per cent of the gross domestic product, or GDP in 2014 to a deficit of 4.3 per cent 2015," the Washington-based institute said.

Dr Garbis Iradian, chief economist at the IIF, speaking to Khaleej Times, said ample foreign assets - official reserves plus sovereign wealth funds - would enable the UAE to maintain its high level of spending on infrastructure and major projects.

"In Abu Dhabi, the government will continue to make significant new investments in the oil, gas and aluminum industries, while current spending would decline slightly, as the increase in the power and water tariffs (targeting also nationals for the first time) will reduce subsidies and transfers from 3.3 per cent of GDP in 2014 to 2.2 per cent in 2015."

Iradian argued that given a relatively diversified economy, excellent infrastructure, a more transparent and better regulated banking system, political stability, ample foreign assets, and a culture that is more open to the outside world and less socially conservative than other GCC countries, the UAE looked resilient to the drop in oil prices.

"Leading economic and financial indicators in the past few months point to continued strong non-oil growth. Nonetheless, we expect overall growth to moderate from four per cent in 2014 to 3.6 per cent in 2015 due to a smaller contribution to growth from hydrocarbon and a deceleration in the pace of growth of services," said Iradian.

In Dubai, major projects and the preparations to host the World Expo 2020 should help to maintain strong growth of about five per cent, he said. "We expect inflationary pressures to subside due to lower import prices and a further modest decline in real estate prices, which could stabilise housing costs. The rise in the 12-month CPI inflation rate to 3.7 per cent in January 2015 was driven by housing costs, which rose by 7.5 per cent."

The IIF observed that banks in the UAE remained well capitalised and profitable. "Financial stability risks - including from domestic vulnerabilities in the real estate market as well as from lower oil prices - appear contained, given the adequate liquidity, high provisions on NPLs and prudent regulation by the central bank in recent years. Deposits and credit, which grew by annual rates of 9.4 per cent and 8.1 per cent, respectively, in January 2015, will moderate as government deposits are likely to decline due to lower oil prices."

Abdul Aziz Al Ghurair, vice-chairman of the Dubai International Financial Centre, has projected that the credit growth of the UAE banks would remain above 10 per cent in 2015 following a robust 2014.

"The UAE banking sector has grown at a phenomenal growth over the past three years. Any growth above 10 per cent is a great growth, particularly when the UAE economy is growing at five per cent," Al Ghurair said on the sideline of a recent seminar.

The institute pointed out the UAE has been the beneficiary of private capital flows from other Mena countries following the political unrest in the Arab world since 2011.

"Foreign direct investment, or FDI, more than doubled to $14 billion (3.5 per cent of GDP) and portfolio flows from equity exchange-traded fund and mutual funds to the UAE have increased five-fold from 2011 to 2014. Capital flows to domestic banks have also risen sharply. This reflects an improvement in market access by government-related entities, especially through syndicated loans and bond issuance, allowing them to benefit from the low interest rate environment."