Oil rally, consolidation to help UAE balance budget by 2019

DEFICIT SET TO NARROW FURTHER, WITH REVENUES LESS DEPENDENT ON HYDROCARBONS

After three years of deficits, the UAE is expected to balance its budget in 2019, thanks to the fiscal consolidation efforts and the high fiscal strength supported by historically large fiscal surpluses, according to rating agency Moody’s.

The general government fiscal balance turned into a deficit in 2015, largely due to the slump in oil prices, and deteriorated further to 2.5 per cent of gross domestic product (GDP) in 2016 despite cuts in government spending. The deficit is likely to narrow to 0.8 per cent this fiscal year and continue to improve.

“The rise in oil prices and spending controls are the main drivers behind the narrowing deficit, although non-oil revenue has increased since 2015 following the introduction of VAT [value-added tax], municipality taxes and increases in government service fees,” said Thaddeus Best, a Moody’s Analyst.

Hydrocarbon revenue represents most income at the consolidated government levels, although it has declined to 42 per cent of total revenue from around for 70 per cent in 2014.

Consolidated UAE government revenues are less dependent on hydrocarbons than Saudi Arabia, Qatar, Kuwait, Oman, or Bahrain because of higher fees on non-oil activities.

Decreasing deficit

Other government revenues include profit transfers and dividends from governmentrelated enterprises (GREs), and returns on investment income in the sovereign wealth fund, primarily the Abu Dhabi Investment Authority (ADIA).

The UAE also implemented a 5 per cent VAT rate in January 2018, which is expected to increase government revenues by up to 1.7 per cent of GDP.

“As a result of Abu Dhabi’s fiscal consolidation and the recovery in oil prices, we expect the UAE’s consolidated government deficit will decrease to 0.8 per cent of GDP in 2018, from an expected 2.3 per cent in 2017,” said Best.

The UAE’s consolidated fiscal position shows a diverging path between Abu Dhabi, where broad spending cuts were enacted, and Dubai, which has continued to increase spending (particularly capital spending) ahead of Expo 2020.

Although revenues remain dependent on oil income, Moody’s analysts believe fluctuations in oil prices to either end of their $45$65 (Dh165-Dh238) a barrel forecast range should not change the outlook substantially.

“Given that our spot forecast is towards the upper end of our range, oil at the bottom of the range would have a greater impact, but even if oil prices average $15 below our baseline projections, we expect the UAE would run relatively small fiscal deficits below 5 per cent of GDP, whereas a $5 a barrel upside surprise to the top of our range would provide small fiscal surpluses but would not allow the UAE to contribute substantially to its government asset position,” said Best.

On a consolidated government basis, the UAE’s general government debt, at an estimated $85 billion at the end of 2017, was equivalent to 22 per cent of GDP.

The federal government has no traded debt. The two emirates of Dubai and Abu Dhabi account for the vast majority of the general government debt.

Debt make-up

The majority of the UAE’s government debt load is concentrated in Dubai, which as of year-end 2017, stood at estimated $60.8 billion.

Included in this is $20 billion of Dubai’s debt, which relates to the financial support from the government of Abu Dhabi during the 2009 debt crisis. This was rolled over in 2014 until 2018, and the coupon lowered from 4 per cent to 1 per cent.

Moody’s estimate Abu Dhabi’s debt increased by more than 100 per cent following last year’s $10 billion issuance.

Among the northern emirates, Sharjah’s direct government debt reached $4.9 billion in first quarter of 2018, consisting of market borrowings in the form of three sukuks of $500 million, $750 million and most recently a $1 billion issuance in March 2018.

This is in addition to a $317 million panda bond issued in February, as well as dollardenominated bank loans from both UAE and foreign banks. Ras Al Khaimah also has $1.7 billion in borrowings.