Non-oil sector set to drive UAE growth
Non-oil sector will drive UAE growth in years to come due to the government's economic diversification efforts introduced in recent past, according to the International Monetary Fund. In latest projection for the UAE economy, the Washington-based financial institution said non-oil sector growth is set to overtake the oil in 2019 and 2020 as the economic reforms started paying the dividends.
The IMF's latest projections showed that the UAE's non-oil sector will grow from 1.3 per cent in 2018 to 1.6 per cent in 2019 and 3.0 per cent in 2020. Consequently, the oil GDP growth is forecast to slow down from 2.8 per cent in 2018 to 1.5 per cent this year and 1.4 per cent next year when Expo-led non-oil sectors such as tourism, aviation, retail, hospitality, real estate and construction will give fillip to the economy. In addition, exports and re-exports will also greatly contribute to the country's economy.
Thanks to stronger non-oil growth, the IMF sees UAE's growth at 2.5 per cent for 2020 as compared to 1.6 per cent this year. These numbers are subject of revision as the IMF team is currently reviewing the performance of the UAE economy. The IMF predicts that the UAE's oil output will continue to increase from 3.02 million barrels per day (bpd) last year to 3.10 million bpd in 2019 and 3.17 million bpd next year. Jihad Azour, director for Middle East and Central Asia Department at the IMF, said over the last few years, oil price has become more volatile and even with acceleration of shocks, it is not really changing its behaviour patterns.
"We are living in an environment, where oil prices will be more volatile and prospects of recovery are limited. Volatility in oil prices affects the regional government's ability to do proper projections for their economies. In the current context, the encouraging signs is that despite the volatility in crude prices, nonoil growth is growing steadily but it has not reached the level of first 5 years of this decade," Azour told media in Dubai.
Oil prices, according to IMF, have swung from $55 to $75 a barrel since the start of the year. However, Azour noted that reforms have started to pay off in region's several countries despite volatility in oil prices and growth slowdown in the oil sector. "We are encouraged by reforms of the GCC countries, performing better in the World Bank's ease of doing business ranking," he said.
He said direct impact of US-China trade war was limited initially but second round effect is getting through - mainly from the region's trade partners. "The region trades with Asia, Europe and Africa; we see expectations of trading partners' growth decelerating, which means exports growth will be affected," Azour said. He called on the regional governments to diversify their revenues through tax and non-tax sources.
IMF said in its report that shortterm growth will remain subdued for oil exporters in the region due to volatile oil prices, precarious global growth and high fiscal vulnerabilities.
As economy slows down, IMF predicts negative inflation in UAE this year at -1.1 per cent and 2.2 per cent for 2020. While the Emirates' nominal GDP is expected to slip from $414.2 billion in 2018 to $405.8 billion this year. But it will recover again next year to $414 billion in 2020 on the back of non-oil sector growth.
For the GCC, the GDP grew 2.0 per cent in 2018 but it slowed down to 0.7 per cent in 2019. It is a cut 1.4 per cent from its April 2019 forecast. For 2020, the GCC is projected to grow 2.5 per cent, a cut of 0.3 per cent from its April 2019 forecast mainly due to oil production cuts in line with Opec+ agreement. Nasser Saidi, president of Nasser Saidi & Associates, said foreign direct investment (FDI) is coming into the region just to exploit natural resources as these are highly capital intensive industries but it is not job creating industries.
"Given the low oil prices, there is no way the GCC countries themselves could finance the infrastructure projects worth over $1 trillion out of their budget resources. They need to attract private capitals to fund infrastructure through public- private partnerships and FDI.