Strong oil prices boost UAE fiscal surplus

Strong oil prices coupled with high crude production boosted the UAE's fiscal surplus to a record high of Dh127 billion in 2008 but the balance could turn into a deficit this year, Western estimates showed yesterday.

The surplus swelled to an all-time high despite a sharp increase in public expenditure by the federal government and each of the country's seven emirates, showed the figures by the London-based Economist Intelligence Unit (EIU).

The consolidated finance account (CFA), which covers federal spending and the budgets of each emirate, recorded the surplus for the fourth successive year after several years of massive deficit because of relatively low oil prices and a steady growth in public spending on infrastructure and other sectors.

"In 2008, strong growth in oil and non-oil revenue pushed up the consolidated fiscal surplus to an estimated Dh127bn, nearly 13.6 per cent of the gross domestic product, in spite of a highly expansionary budget," EIU said in a report on the UAE economy. "In 2009, a decline in oil revenue owing to falling prices and production cuts will push the public finances into a small deficit of around 0.3 per cent of GDP."

The report showed major current expenditure allocations in the 2009 budget are for health, which accounted for 37 per cent, and education , receiving around 23 per cent. The two sectors also had the lion's share of current spending in 2008.

"Assuming average oil prices and production pick up next year, we forecast that the fiscal account will move back into surplus in 2010."

The UAE has not yet published details of its 2008 CFA and EIU gave no estimates of spending or revenue. But financial analysts in Abu Dhabi projected spending at more than Dh200bn, the highest ever.

They noted that the UAE had increased actual CFA spending by an average 15-30 per cent a year over the past decade mainly because of a steady rise in current expenditure and capital spending. Total spending was increased by about 27 per cent to Dh159bn in 2007 from Dh125bn in 2006.

Assuming spending increased by 25 per cent in 2008, it could reach at least Dh200bn, the analysts said.

But the sharp rise was more than offset by the surge in the country's oil revenues, which exceeded Dh330bn in 2008, according to the Energy Information Administration of the US Department of Energy. Non-oil revenues, including customs and other earnings, were estimated at Dh40bn, which means the UAE's total income was above Dh370bn.

But, according to EIU, part of the UAE's oil revenues, mainly those of the main crude producer Abu Dhabi, is not calculated in the CFA budget revenue as it is directly transferred into the country's assets.

Income from the UAE's overseas investments is also not included, which means official budget estimates are underestimated.

"It should be noted that the UAE's official fiscal data understate the real strength of public finances, as a portion of Abu Dhabi's oil earnings is not reported as current revenue, but is instead paid directly into reserve accounts," said David Butter, Middle East Director at EIU.

"Moreover, the figures exclude the income the UAE generates from its large stock of publicly owned foreign assets, although that income is likely to decline substantially in 2009 owing to the global recession." The bulk of the UAE's overseas investments are based in the US and other Western countries and controlled by the Abu Dhabi Investment Authority (Adia), one of the largest sovereign wealth funds in the world.

Recent estimates by the US Council on Foreign Relations (CFR) showed Adia's assets plunged by $183bn (Dh672bn) as a result of the global financial crisis in 2008. But there was a net inflow of nearly $59bn because of the sharp increase in the UAE's oil export revenues. At the end of 2008, Adia controlled $328bn compared to nearly $453bn at the end of 2007, CFR said.

The decline depressed the country's investment income to Dh30bn in 2008 from Dh46.3bn in 2007, according to IMF. Unlike Saudi Arabia and other Gulf nations, the UAE has not resorted to domestic borrowing to shore up its budget shortfalls. Instead, it has used its investment returns to bridge the gap, which hit an all-time high of Dh29.39bn in 2003 after a sharp rise in spending.

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