United Arab Emirates

The United Arab Emirates, the world’s sixth-largest producer of crude oil, is a federation of seven states. It has grown as one of the Middle East’s most important economic centres since the formation of the federation in 1971.

The UAE has an open economy with a high per capita income and a sizable annual trade surplus. Over the past 30 years, the country has undergone a profound transformation from a small desert to a modern state with a high standard of living. Successful efforts at economic diversification have reduced the portion of GDP based on oil and gas output to 30pc.

The UAE has been seeing a steady increase in job opportunities due to diversification of the economy. It relies heavily on foreign labour to keep its projects and the economy running. The government has increased spending on job creation and infrastructure expansion and is opening up utilities to greater private sector investment. It saw a record growth in its labour market last year, with the employment rate rising 10pc compared to 2013. The ratio between expatriates and nationals is one of the highest in the world. Emiratis account for about 11pc of the population in the country.

According to the Economic Ministry, the economic growth slowed down last year, expanding 4.6pc compared to 5.2pc in 2013. However, business conditions in the non-oil private-sector economy continued to improve. Against the backdrop of lower oil prices, the government is aiming to boost the manufacturing sector’s contribution to the country’s GDP from the current level of 11pc to 25pc by 2025. In order to reach that goal, the government is planning to support industrialisation along with stimulating foreign investment.

According to Sheikh Mohammed Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, the government spending on infrastructure, amid lower oil prices, is driving growth. In 2015, the economy will continue booming and diversifying despite falling oil prices as the government will continue implementing a long-term plan to ensure economic diversification away from the oil industry. While hydrocarbons still form the bulk of federation economy, the sector’s contribution to GDP has been falling over the last ten-years as the emirate pushes ahead with diversification goals in line with Economic Vision 2030 Plan. The UAE has financial reserves equivalent to about 275pc of GDP which should be enough to sustain current spending levels for decades to come.

The country’s non-oil sector, which grew by 8.1pc and accounted for 69pc of GDP in 2014, is expected to show strong performance in years ahead. Infrastructure spending will be increasingly important for the development of high-tech and knowledge-based industries. Last year decrease in oil prices has had a positive impact in some sectors, including transport and storage, wholesale and retail and construction.

The UAE has benefitted from building up large external and fiscal buffers over the years due to its hydrocarbon wealth. The Federation has made much progress in managing its debts.The non-oil GDP is forecast to grow at 4.4pc this year, moving up to 4.5pc in 2016. GDP grew 3.6pc while non-oil GDP registered a growth of 5.2pc in 2014.

With the decline in oil prices, the fiscal balance this year is projected to turn negative for the first time since 2009. According to the IMF, in 2015 the fiscal deficit will be around 2.3pc of GDP compared to a 5pc surplus last year. The Fund predicts a 2.2pc fiscal surplus for 2016. The current account surplus is also projected to decline substantially to 4.1pc of GDP.

Bahrain

Bahrain has made great efforts in diversifying its economy despite big challenges. The economy continues to depend heavily on oil. In 2011 Bahrain experienced economic setbacks as a result of domestic unrest, however, the economy recovered in 2012, partly as a result of improved tourism. The struggling and oil-dependent economy suffered an additional blow in mid-2014 with the dramatic fall in hydrocarbon prices. This has triggered new economic challenges for the government. Bahrain already faces long-term economic challenges. Amongst them, youth unemployment and rising government debt seem more difficult to address.

Analysts expect that sluggish oil prices and rising debt levels will limit growth in 2015. The kingdom’s GDP is seen growing at 3.6pc this year, primarily due to flat oil production. Bahrain saw sustained acceleration in non-oil growth in 2014 and the trend is expected to continue. Real GDP growth slowed to 4.5pc in 2014 from 5.3pc in 2013 with hydrocarbon sector contributing 3pc growth and the non-oil economy expanding by 4.9pc during the year. In 2013, the hydrocarbon sector had recorded 15.2pc growth while the non-oil sector growth was 3pc.

Moody’s forecasts real GDP growth of around 2.7pc in 2015 and 2016 with the non-oil sector as driving force. Economic prospects in the near-term are strongly linked to the hydrocarbon sector. Low oil prices will weigh on the economy in the coming years. By contrast, the non-oil sector is projected to remain strong.

Against the backdrop of cheaper oil, Bahrain’s draft budget for 2015-16 envisages lower government spending along with a sharp rise in the fiscal deficit. The shortfall is estimated at $3.9bn in 2015 and $4.1bn in 2016 against the actual deficit of $1.2bn in 2014. Total expenditures for 2015 and 2016 are projected at $9.4bn and $9.8bn versus $9.3bn in 2014. Receipts are set at $5.5bn in 2015 and $5.7bn in 2016 compared to $8.1bn in 2014. Fitch reports that sizable fiscal deficits has led to a rapid rise in the general government debt burden. The government debt will continue climbing to 54.2pc of GDP in 2015 and 58.6pc in 2016 against 45.1pc in 2014.

The main challenge facing Bahrain is the ability to curb public spending while raising revenues to prevent deficit swelling out of control. The Bahraini government aims to push the private sector to drive much-needed growth but the country’s economy remains extremely dependent on support from GCC funds, particularly from Saudi Arabia and the UAE. The state can cut wasteful spending on subsidies and increasing revenues through taxes and fees.

Published in Dawn, Economic & Business, July 6th, 2015

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