Possible UAE rate increase to dampen loan demand
dubai — Gradual and steady policy rate hikes in the US by the end of this year and in 2017 would imply further increases in interest rates in the UAE in the context of the peg to the dollar, the Institute of International Finance (IIF) said.
Combined with a significant appreciation of the UAE currency in real effective terms, the US rate hike will dampen loan demand, make real estate prices and tourism more expensive and hurt non-oil exports, the IIF said.
“Also, subdued global trade will likely dampen demand for re-export from the UAE’s ports. Nonetheless, we do not expect a change in the exchange rate regime given that the peg is regarded as a critical anchor for price and financial stability,” the IIF said in its forecast for the UAE.
The Washington-based body said the UAE’s growth model has delivered strong economic development in the past two decades, supported by a surge in public spending and large increase in foreign labour, which contributes more than 90 per cent of total employment.
“However, this growth model has also resulted in stagnating levels of productivity, and progress towards diversification has remained limited. To sustain higher growth over the medium term, further reforms are needed [including facilitating SMEs’ and start-ups’ access to finance, and quality improvements to education and training] to raise total factor productivity to 1.5 percentage points. But the main challenge is to ensure that nationals are equipped with the right qualifications and work ethic to make them competitive in the private sector job market,” said the report.
The IIF noted that the UAE has been relatively resilient to the impact of the slump in oil prices as it has benefited from a relatively diversified economy, excellent infrastructure, political stability and ample foreign assets.
Growth is set to moderate to 2.3 per cent in 2016 due to slowing oil production and deceleration in nonhydrocarbon growth, which is constrained by reduced public investment and a cut in Abu Dhabi government transfers to GREs.
The appreciation of the US dollar in the past two years to which the UAE dirham is pegged, is also hurting non-oil exports of goods and services. Beyond 2016, non-hydrocarbon growth is expected to recover to four per cent by 2018 as the drag from cutbacks in public spending comes to an end, economic sentiment improves with the gradual increase in oil prices, and private investment picks up in the run-up to the Expo 2020.
“While the diversified economy of Dubai is less affected by the sharp fall in oil prices, the emirate is still burdened with high debts [around 140 per cent of GDP] and faces large servicing of debt through 2018,” the IFF said.
The authorities are pressing ahead with strong fiscal consolidation, although a gradual adjustment is preferable to minimise the negative impact on growth. Reductions in energy subsidies and non-priority spending led to 15 per cent decline in government spending in 2015.
— issacjohn@khaleejtimes.com