World economies

Aug 27 2018

Email

THE UAE, a federation of seven monarchies, is one of the world’s wealthiest countries in terms of per-capita income and has the world’s seventh-largest proven crude oil reserves.

At less than 20 per cent of the population, the citizens of the UAE are a minority in the federation where as expatriates represent about 85pc of the labour force. With a $699 billion gross domestic product and $68,895 per capita on purchasing power parity basis; its economy is the second largest in the Arab world after Saudi Arabia.

Although the UAE has the most diversified economy in the GCC, it remains extremely reliant on oil. Most of the Emirates’ oil and gas is produced in Abu Dhabi where about 94pc of the UAE’s oil and gas is found.

A massive construction boom, an expanding manufacturing base, and a thriving services sector are helping the UAE diversify its economy. More than 85pc of the economy is still dependent oil exports.

UAE’s proven crude oil reserves have been assessed at 97.8bn barrels since 1997. The country is expected to maintain production at the current rates for the coming 80 years. The UAE has become the third-largest energy consumer in the Arab world as a result of rapid economic development and energy-intensive indus­trialisa­tion.

The hydrocarbon economy makes up to 80pc of the government’s revenue while tourism is one of the bigger non-oil sources of revenue in the UAE.

Preliminary estimates by the Federal Competitiveness and Statistics Authority revealed real GDP grew 0.8pc in 2017. The IMF has estimated 2017 GDP growth further down at 0.5pc, largely driven by negative growth of 2.5pc in the oil GDP.

Economic growth is expected to bounce back in 2018, accelerating by 2.6pc due to higher oil prices, stronger external demand and easing of fiscal consolidation. Inflation is expected to temporarily increase to about 4.5pc in 2018 as a result of the five per cent VAT introduction while house prices continue to decrease.

The economic activities are expected to continue facing challenges in the second half of this year before accelerating in 2019. Increased infrastructure spending in the run-up to the World Expo 2020 event in Dubai will help stimulate economic activity next year.

The stimulus and structural reform measures are expected to improve UAE non-hydrocarbon economic activity which is likely to turn the corner in 2019 with growth expanding by four per cent. The UAE central bank is projecting the economy to accelerate 3.8pc driven by non-oil GDP expansion of 4.3pc in 2019. Further fiscal consolidation and higher-than-expected oil prices offsetting the uptick in government spending are expected to swing fiscal gap to surplus this year.

High oil prices, fiscal stimulus and structural reforms are likely to support a growth recovery in 2018 and 2019. Moody’s expect 2018 fiscal deficit to narrow to 0.8pc of GDP, mainly supported by the financial backing of Abu Dhabi’s large hydrocarbon reserves and oil prices touching $80 a barrel.

Government revenues will increase amid higher oil prices and the implementation of several non-oil revenue raising measures. Therefore, the fiscal deficit will decrease only marginally in 2018 and 2019. The UAE can afford this more gradual fiscal adjustment as long as the actual oil price is above its fiscal break-even oil price.

Bahrain

Bahrain is the smallest oil producer in the Arabian Gulf. Oil production and refining represent 80pc of the country’s income.

Though it was one of the first states in the Gulf to discover oil and to build a refinery; its oil production never reached the levels of production enjoyed by Kuwait or Saudi Arabia. The kingdom has lately announced its biggest hydrocarbons discovery in more than eight decades, which is expected to outsize existing reserves.

The new resource is forecast to contain highly significant quantities of tight oil and deep gas which will come as much-needed relief to Bahrain.

Bahrain’s GDP is mostly driven by the services sector, 60pc, and the industrial sector 40pc. The financial sector plays a preeminent role in the region and generates main economic activity after the oil sector.

The Kingdom is striving to position itself as a key regional player in financial services, telecommunications and transports.

It has the most established finance centre in Gulf and is widely regarded as the best-regulated financial centre in the Middle East.

It has been the region’s undisputed financial capital for more than 40 years. Financial services currently make up 27.6pc of GDP. Diversification is an economic priority for Bahrain, given the Kingdom’s dependence on oil and the near depletion of its hydrocarbon reserves.

In the process, petroleum processing and refining, aluminium production, finance and construction became the major economic activities. Bahrain Economic Development Board reveals that the kingdom’s real GDP grew by 3.9pc in 2017 against 3.2pc in 2016, with the non-oil economy expanding by five per cent, making it the fastest growing country in the GCC.

Faced with declining oil reserves, Bahrain has turned to petroleum processing and refining and transformed itself into an international banking centre. Despite recently enacted austerity measures, Bahrain remains the most vulnerable Gulf country in the face of lower oil and commodity prices due to its limited savings and sharply rising debt levels, leaving it exposed to financing risks.

Economic growth is expected to moderate in 2018 and 2019. A drop in oil prices could impact Bahrain’s economy. 2018 will see real GDP growth decelerating to 1.7pc from 3.9pc in 2017as low oil prices weigh on domestic demand and market uncertainties prevent the economy from performing at its full potential.

By 2019, however, the economy is expected to show a moderate growth of 2.1pc as the country is set to own the largest single-site aluminium smelter in the world next year.

Low oil prices in 2017 have generated at least a $4bn fiscal deficit which is nearly 14pc of GDP. The country’s fiscal deficit is projected to reduce further to 11pc in 2018.

Published in Dawn, The Business and Finance Weekly, August 27th, 2018