(MENAFN- Khaleej Times) Lowering oil prices means that the UAE is likely to face a greater risk of a small consolidated fiscal deficit in 2015.
'Oil accounts for less than 15 per cent of the Dubai government's revenue, and Abu Dhabi has a substantially lower budget break even oil price than the consolidated budget,' an economic research note issued by Abu Dhabi Commercial Bank said.
With the lower price outlook, oil-producing GCC countries are moving toward fiscal reforms and adjustments that would have been more difficult to implement in a higher oil price environment. Abu Dhabi has already announced new water and power tariffs effective from January 2015 and Oman will see further liberalisation in the price gas is sold to major industrial producers in 2015, says Dr Monica Malik, chief economist at ADCB, in her latest economic research note issued on Monday.
In the UAE, the ADCB research note fears a moderate deceleration in real non-oil growth, although remaining solid and above five per cent. 'The more diversified nature of the UAE economy supports the outlook. We remain positive on the UAE's economic outlook despite the sharp fall in global oil prices June 2014,' the note said.
Growth is being bolstered by multiple drivers, including solid non-oil external demand, the rebound in real estate activity, and an accommodative monetary and fiscal policy. Real non-oil growth will, however, remain above headline real GDP growth, as a result of lower hydrocarbon activity.
So far in 2014, the UAE's oil output has remained steady, which is reflected in our expected deceleration in real headline growth in 2014 to 4.4 per cent, and we forecast a greater deceleration in 2015 headline growth to 3.3 per cent on expected lower oil production.
ADCB's nominal growth forecasts for 2014 and 2015 also reflect lower oil price assumptions. Kuwait and Oman are also reviewing the possibility of wider fiscal reforms withdrawal of subsidies introducing of taxes and reduced government spending.
'We see these fiscal reforms as positive for improving longer-term fiscal sustainability. On the spending side, we expect the GCC countries to target current expenditure. Many have already moved to reduce current spending growth from 2013, after the sharp rises seen in 2011 following the regional political developments,' the research note said.
Lower subsidy spending should also result in weaker current spending growth in 2015. 'In general, we expect investment expenditure growth to outstrip current spending in 2015 and 2016,' Malik said. She said that nations like Bahrain and Oman may face greatest pressures, as there is a need for fiscal retrenchment in Bahrain, where support from other GCC countries is vital in terms of making progress with key infrastructure projects, including critical social initiatives in the areas of housing and healthcare.
However, on Qatar and Saudi Arabia, Dr Malik saw the possibility of a marginal growth in real non-oil GDP in 2015 despite lower forecast oil revenues as both countries have seen strong project awards so far in 2014, which will make 'good progress'.
Consumption activity was further dampened in the first half of 2014 with the spread of the MERS virus, in the Kingdom. A continued push to increase job creation for nationals should also support domestic demand in Saudi Arabia in 2015.
Kuwait is able to increase government spending, given its low budget breakeven oil price and strong FX reserves. The note forecasts a fiscal surplus for Kuwait in 2015 and 2016. Saudi Arabia's position was different in the 1980s and 1990s, and government spending responded to oil revenue developments.
Generally, the strong oil prices of the last 10 years have been much better managed than during the oil boom of the 1970s and early 1980s. With the substantial improvement in Saudi Arabia's debt and FX reserve positions, Saudi Arabia can easily manage the small deficits forecast for 2015 and 2016 of less than five per cent of GDP.
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