Improving finances to support spending
UAE is in a strong fiscal position and supports reforms on expenditure and revenue side
Steady improvement in the fiscal position of the UAE following conservative fiscal reforms in the wake of persistent decline in oil prices and the recent improvement in crude prices have created more fiscal space for the government to support growth, according to economists.
According to the Institute of International Finance (IIF), the sizeable fiscal consolidation of the past three years should put the fiscal stance on a more sustainable footing for the UAE over the medium term.
“We see the fiscal balance shifting from a deficit of 1.8 per cent in 2017 to a surplus of 1.7 per cent in 2018 as higher oil revenues will more than offset the significant increase in government spending. The external position remains in an enviable position. We expect the current account surplus to widen to $44 billion, 10.2 per cent of GDP, in 2018 backed by higher oil exports,” said Garbis Iradian, Chief Economist Mena of IIF.
The IIF has forecast the UAE’s public foreign assets to continue increasing to $896 billion, close to 200 per cent of GDP by 2019 and the country to remain the main regional destination of foreign direct investment (FDI) inflows at about $11 billion in 2018 (2.7 per cent of GDP), and accounting for 23 per cent of total FDI to the MENA region.
Economists from Abu Dhabi Commercial Bank (ADCB) believe that the UAE’s fiscal strength supports its efforts to stimulate the economy through a combination of higher public spending and additional stimulus through measures such as fee waivers.
Strong fiscal position
“We believe that the UAE is in a strong fiscal position to support these initiatives (on expenditure and revenue side) given the expected support to the fiscal position from the higher oil price, the introduction of VAT and the previous fiscal consolidation. We forecast that the consolidated fiscal balance should return to a surplus in 2018 and will likely remain in surplus in 2019. However, we see the government’s fee income potentially falling as a result of the measures to reduce the cost of government services. Overall, in our view the direct cost of the support packages to the fiscal position should be contained,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
Government spending
ADCB’s economists said direct government spending will provide the most immediate support by creating new demand. However, they said structure of the stimulus will be critical, particularly the magnitude of any increase in public expenditure, and the sector allocation and speed of deployment.
“With the details provided so far, we believe that a major part of Abu Dhabi’s Dh50 billion stimulus may not be via direct government spending, and elements of the new expenditure could take time to plan and deploy. Part of Dubai’s support plan centres on reducing government fees. Meanwhile, policies to strengthen the investment environment and support population growth will be positive but likely take time to build momentum,” said Malik.
While credit support facilities to SMEs could also have a limited shorter-term impact given the weak domestic demand backdrop, reducing the costs of government services and the payment of arrears will provide some important liquidity and cash flow relief to companies alongside reducing some cost pressures, though again this is likely to have a modest impact in terms of generating new demand.
In broad terms, the recent reforms relating to residency, and improvement in the job market that comes with higher investments are expected to boost domestic demand in the medium term.