UAE financial account turns positive in 2009

A sharp fall in government capital outflow allied with heavy repatriation of overseas funds by the private sector to turn the balance in the UAE’s financial account upside down after hitting a record deficit in 2008.

Official data showed the government slashed its transfer of capital to foreign markets to about Dh20 billion in 2009 from Dh108.2bn in 2008 apparently because of a plunge in oil prices and commitment to record high public expenditure following the 2008 global fiscal crisis.

After siphoning out around Dh50.4bn in 2008, non-bank private institutions repatriated nearly Dh51bn in 2009 because of global market volatility and liquidity shortages at home, according to the figures by the Central Bank.

UAE banks also reduced their capital outflow to around Dh36.3bn last year from nearly Dh44.9bn in 2008 after bringing back a record high Dh178bn in 2007 to meet soaring demand for domestic credit during that year.

Such developments allowed the UAE to record a financial account surplus of around Dh8.4bn after suffering from its highest deficit of Dh203bn in 2008 and a massive surplus of nearly Dh105.4bn in 2007.

“Private non-banks were the largest contributor to private capital’s positive net balance according to Central Bank data,” the Kuwaiti-based Global Investment House said in a study about the UAE’s current account.

It said the account reverted to a surplus last year despite a massive decline inforeign director investment (FDI) because of the global crisis. “Due to the global recession, FDI decreased heavily all over the world, including the UAE. FDI flows into the UAE for 2009 were around $4bn, down by nearly 71 per cent from the 2008 figure,” it said.

“FDI is very beneficial to a country’s economy. It aids the economic development of the country being invested in as it creates new jobs and improves salaries of employees. FDI provides a major source of capital to the country, along with advanced technology, which can then be used in the country to improve market sectors and increase the nation’s competitiveness.”

Despite the positive balance in the financial account last year, the country’s current account surplus plunged to around Dh28.8bn from nearly Dh81.8bn in 2008, according to the Central Bank.

The figures showed the decline was mainly due to a steep drop in the UAE’s exports to around Dh705 billion from Dh878bn in the same period. The drop was a result of lower oil prices and the country’s crude output.

Citing projections by the International Monetary Fund, GIH said the UAE’s current account is expected to rebound to nearly seven per cent of GDP in 2010. This means the surplus could swell to Dh65bn as the GDP is forecast by the Washington-based IMF at about Dh932bn this year. “That growth would result in a 127 per cent increase over the 2009 figure, and IMF is projecting the current account to grow steadily in the following year.”

Financial analysts believe the UAE government cut transfers to its overseas investments because of lower oil prices and funding of budgetary spending.

They noted that the decline of around $30 in oil prices in 2009 combined with a cut of more than 200,000 barrels per day in the UAE’s crude output depressed its oil export earnings to just under $50bn from a record $92bn in 2008.

“The UAE government’s transfers out of the country normally gain pace when there are surplus funds mainly because of high oil prices,” one analyst said. “I think there was a budget surplus in 2009 but not as high as that in 2008.”

The Central Bank figures showed the UAE’s balance of payment recorded a relatively low deficit of Dh22.5bn last year compared to a record high gap of about Dh172bn in 2008. Transfers by the more than three million expatriate workers in the country slightly fell for the first time in many years but kept weighing heavily on the UAE’s current account. From about Dh36.7bn in 2008, the transfers receded to nearly Dh35bn in 2009,  the report showed.

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