NBK Eco­nomic Up­date

Kuwait Times - - BUSINESS -

Real GDP in the UAE is ex­pected to mod­er­ate in 2017 as crude pro­duc­tion is low­ered, in com­pli­ance with the agree­ment among OPEC mem­bers to cut crude sup­ply. Whilst the oil sec­tor is pro­jected to act as a lag­gard on over­all growth, the non-oil sec­tor is set to con­tinue to pro­pel for­ward and off­set a con­tract­ing oil sec­tor. Sub­se­quently, we fore­see real GDP mod­er­at­ing from an es­ti­mated 2.4% in 2016 to 2.2% in 2017.

Growth in the oil econ­omy is ex­pected to be lim­ited in the medium-to-long term on the back of planned pro­duc­tion cuts. In May, OPEC and a group of non-OPEC na­tions agreed to ex­tend a six-month out­put cut that was sched­uled to end in June, to at least the end of the first quar­ter of 2018, in a bid to prop up oil prices. As a re­sult, real oil GDP is ex­pected to de­cline by around 1% in 2017, be­fore ris­ing by 2.6% in 2018 as pro­duc­tion is grad­u­ally re­stored to its pre-pro­duc­tion cut lev­els.

The non-oil econ­omy is fore­cast to gain some ground in 2017 and main­tain that strong mo­men­tum in 2018, as the con­struc­tion and tourism sec­tors (some of the big­gest con­trib­u­tors to non-oil GDP growth) re­main buoy­ant. The con­struc­tion sec­tor will be sup­ported by eas­ing fis­cal con­sol­i­da­tion as well as higher Dubai Expo 2020 re­lated in­fra­struc­ture in­vest­ments. The nonoil econ­omy is also set to be sup­ported by the res­i­den­tial real es­tate sec­tor, which af­ter wit­ness­ing al­most two years of slow­ing growth is show­ings signs of sta­bi­liza­tion. We an­tic­i­pate a jump in real non-oil growth from around 2.6% in 2016 to 3.6% and 4.5% in 2017 and 2018, re­spec­tively.

The lat­est data on the UAE’s Mar­ket Pur­chas­ing Man­agers’ In­dex (PMI), a good gauge of non-oil sec­tor growth, also show that non-oil sec­tor ac­tiv­ity is set to re­main solid in the nearto-medium term (Chart 3). The head­line PMI slipped in May, but still re­mained fairly solid at 54.3, as sta­ble lo­cal eco­nomic con­di­tions helped off­set some of the soft­ness in global de­mand.

Over­all non-oil econ­omy propped up

Much of the non-oil econ­omy’s mo­men­tum con­tin­ued to be fu­elled by Dubai’s hos­pi­tal­ity and con­struc­tion sec­tors. The num­ber of pas­sen­gers pass­ing through Dubai In­ter­na­tional Air­port re­mains near record highs. In April, this num­ber stood at7.6 mil­lion pas­sen­gers, up a healthy 9.2% year-on-year (y/y). De­spite an on­go­ing de­cline in av­er­age daily room rates at ho­tels in Dubai over the past year, de­mand for ho­tel rooms re­mains solid as re­flected in the av­er­age oc­cu­pancy rate. Ac­cord­ing to Ernst & Young’s lat­est MENA Ho­tel Bench­mark Sur­vey, oc­cu­pancy rates among ho­tels in Dubai av­er­aged 88% in April (the high­est in the MENA re­gion).

Dubai’s con­struc­tion sec­tor is also a ma­jor con­trib­u­tor to non-oil growth. Con­struc­tion ac­tiv­ity is ex­pected to hold strong, es­pe­cially as Dubai pre­pares for the Expo 2020 event. Projects in­clude the con­struc­tion of build­ings, metro ex­pan­sions, roads and bridges. The con­struc­tion sec­tor is also set to ben­e­fit from plans to foster the UAE’s Vi­sion 2021 and longterm strat­egy to es­tab­lish a post-oil “knowl­edge econ­omy” via the “UAE Strat­egy for the Fu­ture” blue­print. The strat­egy aims to bol­ster the na­tion’s non-oil econ­omy and en­hance its eco­nomic di­ver­si­fi­ca­tion. The re­silience in Dubai’s non-oil econ­omy is re­flected in the Emi­rates NBD Dubai Econ­omy Tracker In­dex (DET) (Chart 4). The DET is a for­ward-look­ing in­dex sim­i­lar to the PMI which tracks non-oil ac­tiv­ity in Dubai. It has grad­u­ally been re­gain­ing its mo­men­tum amid im­prove­ments in the travel & tourism and whole­sale & re­tail trade seg­ments.

Dubai res­i­den­tial prop­erty price growth sta­bi­liz­ing

Dubai’s res­i­den­tial prop­erty prices con­tin­ued to sta­bi­lize, fol­low­ing al­most two years of de­cline amid tighter reg­u­la­tions, higher hous­ing sup­ply and risk aver­sion. Ac­cord­ing to Asteco’s quar­terly in­dexes, prices of apart­ments and vil­las in 1Q17 ap­peared steady, though they are down by 3.0% y/y and 1.3% y/y, re­spec­tively. We ex­pect the sta­bi­liza­tion pe­riod to con­tinue at least un­til the end of 2017, af­ter which we may see res­i­den­tial price growth pick up on the back of stronger de­mand. The value of real es­tate trans­ac­tions con­tin­ues to trend lower (Chart 6),while growth in the num­ber of trans­ac­tions ac­cel­er­ated some­what re­cently, which may be in­dica­tive of signs of strength in the “more af­ford­able” hous­ing seg­ment.

In­fla­tion face some up­ward pres­sure

In­fla­tion in the con­sumer price in­dex (CPI) soft­ened re­cently, af­ter re­treat­ing from 3.0% y/y in March to 2.2% y/y in April, as hous­ing in­fla­tion (which weighs more heav­ily in the in­dex) con­tin­ued to trend lower and as food costs de­clined. We ex­pect CPI in­fla­tion to grad­u­ally edge higher in the sec­ond half of 2017 and av­er­age around 2.5% for the year, as a re­cov­ery in oil prices pushes in­fla­tion in the trans­port seg­ment up, as hous­ing in­fla­tion gath­ers pace and amid tax hikes planned for se­lected con­sumer goods in 4Q17.

Fis­cal deficit fore­cast to nar­row in 2017

We ex­pect the fis­cal deficit to nar­row in 2017 thanks to more pru­dent pub­lic spend­ing and higher rev­enues. We es­ti­mate the fis­cal deficit widened to 3.6% of GDP in 2016 af­ter hav­ing slipped into a deficit for the first time in six years in 2015on the drop in oil prices. But with global oil mar­kets re­cov­er­ing and a more pru­dent fis­cal pol­icy in place, the deficit is seen nar­row­ing to 1.8% in 2017 and re­turn­ing to a slight sur­plus of 0.6% in 2018.

Thanks to the UAE gov­ern­ment’s abun­dant fi­nan­cial re­serves that hover above 200% of GDP, fis­cal deficits have been man­age­able. In ef­fect, this has helped both Dubai and Abu Dhabi main­tain high lev­els of pub­lic spend­ing, par­tic­u­larly on in­fra­struc­ture projects. In Dubai, in­fra­struc­ture spend­ing is set to ac­cel­er­ate in the run-up to the Expo 2020 event. None­the­less, the ma­jor emi­rates have em­barked on some fis­cal ad­just­ment and re­form, in­clud­ing the es­tab­lish­ment of the Fed­eral Tax Au­thor­ity (FTA), sub­sidy cuts and the in­tro­duc­tion of fees and taxes on se­lected goods and ser­vices. Ac­cord­ing to of­fi­cial re­ports, Abu Dhabi has cut back or de­layed spend­ing on a num­ber of projects des­ig­nated as low-pri­or­ity. Ef­forts have also been made to rely more heav­ily on the pri­vate sec­tor for im­ple­men­ta­tion of some projects.

The newly es­tab­lished FTA re­cently an­nounced that it would im­pose a 100% tax on to­bacco and en­ergy drinks and a 50% levy on car­bon­ated drinks from 4Q17. Fur­ther­more, it in­creas­ingly looks likethe UAE will be one of the first GCC na­tions to im­ple­ment a value-added tax (VAT).The first phase of im­ple­men­ta­tion, sched­uled for the be­gin­ning of 2018, will in­clude UAE com­pa­nies with an­nual rev­enues greater than $1 mil­lion (Dh3.75 mil­lion). At 5%, the VAT is ex­pected to gen­er­ate around $3.3 bil­lion (Dh12­bil­lion) in tax rev­enues or around 1% of GDP.

In an at­tempt to pre­serve for­eign as­sets, the UAE has also tapped into in­ter­na­tional debt mar­kets to plug its bud­get gap. In April 2016, Abu Dhabi is­sued$5 bil­lion in sov­er­eign bonds, the first is­suance since 2009. Moody’s re­cently af­firmed the UAE’s Aa2 credit rat­ing and up­graded its out­look from neg­a­tive to sta­ble, cit­ing an ef­fec­tive pub­lic pol­icy re­sponse to the lower oil price en­vi­ron­ment and im­proved eco­nomic growth prospects. The main credit de­fault swaps (CDS), which are deemed to be good bell­wethers of a sov­er­eign’s level of risk, fell to new lows fol­low­ing Moody’s an­nounce­ment. As of mid-June, the CDS on five-year Dubai and Abu Dhabi gov­ern­ment debt stood at 130 and 52 ba­sis points, re­spec­tively. With in­vestors glob­ally in search for yield amid a low global rate en­vi­ron­ment, the re­cent credit af­fir­ma­tion and out­look up­grade should be a fur­ther boon to the UAE bond mar­ket.

Cur­rent ac­count sur­plus to ex­pand

The sur­plus in the cur­rent ac­count bal­ance is pro­jected to ex­pand for the first time in four years in 2017, as oil ex­port earn­ings re­cover and non-oil ex­port growth gath­ers pace. We fore­see the cur­rent ac­count sur­plus ris­ing from a six-year low of around 4.8% of GDP in 2016 to a pro­jected 5.1% in 2017.

Non-oil ex­port growth may con­tinue to be af­fected by a stronger dirham. The stronger dol­lar has led to an ap­pre­ci­a­tion in the dirham’s trade-weighted in­dex, in­creas­ing the cost of ex­ports and mak­ing it a more ex­pen­sive place to visit and in­vest in. Trade with Asian mar­kets has been most af­fected by the stronger dirham, as their cur­ren­cies weak­ened against a stronger US dol­lar. Tourism, how­ever, has been less af­fected, given that a ma­jor­ity of tourists are from the GCC, and so has in­vest­ment in real es­tate, which de­pends far more on UAE na­tion­als. As a re­sult, the gains in the tourism and real es­tate sec­tors are ex­pected to more than off­set the costs of a stronger dol­lar. This should help keep non-oil ex­port growth ebul­lient.

Bank­ing liq­uid­ity re­cov­ers on stronger oil rev­enues

Fol­low­ing al­most two years of mod­er­a­tion, lend­ing ac­tiv­ity ap­pears to have plateaued in early 2Q17 on the back of im­prove­ments in the real es­tate and con­struc­tion sec­tors. In April, lend­ing growth came in at a mod­est 5.3% y/y. Growth in bank de­posits con­tin­ues to trend up­ward. At the end of 2016, it sur­passed lend­ing growth for the first time in al­most two years, thanks to higher oil ex­port re­ceipts, which have helped re­plen­ish gov­ern­ment de­posits. Af­ter de­posit growth logged in a healthy pace of 7.1% y/y in April, the loan-tode­posit ra­tio sub­se­quently eased fur­ther to 99.4% dur­ing the same pe­riod.

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