Higher crude production will ally with an increasing in public spending and better performance in Dubai’s non-oil sectors to boost the UAE’s economy by nearly four per cent in 2011, a key Saudi bank said on Saturday.
The forecast growth by Saudi American Bank Group (Samba) is higher than the 3.5 per cent rate projected by the International Monetary Fund, which itself had revised up its previous 3.3 per cent growth level.
“While still weak real estate sectors and debt problems in Dubai are providing stiff headwinds, real GDP growth is now projected to rise to four per cent this year, moderating to 3.6 per cent in 2012,” Samba said in a study.
It said the higher growth forecast was a result of a large increase in the UAE’s crude output following the loss of Libya’s oil supplies due to unrest there.
Samba said there has been no formal OPEC agreement on higher output but added the 12-nation group is acting to stabilise oil markers.
Citing independent data, it said the UAE crude production was up almost 10 per cent year-on-year in March at just over 2.5 million barrels per day compared with a formal quota of 2.2 million bpd.
Production of NGLs is also rising and exceeded 600,000 bpd for the first time in March, an increase of 21 percent year on year, it said.
“These volume increases will have a direct and positive impact on real GDP growth, but will also generate additional revenues—mainly for Abu Dhabi, which appears prepared to use them to stimulate growth,” the report said.
Samba noted that the non-hydrocarbon sector in the UAE’s “more diversified” economy accounts for over 75 per cent of GDP in constant prices, and there is mounting evidence that outside of real estate this sector is performing well.
Construction and related activities are benefiting from public infrastructure spending from both the government and its related enterprises, with plans by Mubadala to invest over $16 billion this year. Over $8.2 billion in projects has been awarded in the four months to April according to data compiled be Meed, an increase of 32 per cent year-on-year, and another $105bn worth remain in the pipeline, the report said.
“Meanwhile, Dubai is benefiting from its position as a regional hub and its strong links with Asia which have helped spur a revival in trade, tourism and logistics.”
Citing official statistics, the report showed passenger traffic through Dubai airport was up six per cent in the first quarter year-on-year, following a 15.3 per cent increase for 2010 as a whole. But it added that while Dubai may have benefited from some diversion of tourists away from North Africa and Bahrain, regional unrest appears to have adversely affected cargo business, which saw a three per cent decline over the same period, following robust growth of 17.7 per cent in 2010.
“A number of other indicators of non-oil activity are positive: hotel occupancy rates have risen to around 85 per cent, points of sale transactions—a proxy for consumption—have rebounded, and year-on-year the volume of exports (including re-exports) and imports grew by 26.5 per cent and 39 per cent respectively in January,” the study said.
A breakdown showed the oil sector is projected to grow by 5.8 per cent in 2011 before dipping to nearly 1.5 per cent in 2012. The non-hydrocarbon sector is forecast to expand by 3.4 per cent this year and pick up by 4.2 per cent in 2012.
The report expected higher oil production and prices to widen the UAE’s current account surplus from around 6.9 per cent of GDP in 2010 to 12.2 per cent in 2011 and 13.3 per cent in 2012. The country’s fiscal surplus is also projected to turn from a deficit of 1.4 per cent in 2010 to a surplus of around 6.9 per cent in 2011 and nearly 6.1 per cent in 2012, Samba said.
“Abu Dhabi’s budget intentions have not been publicly announced, but it appears clear that any thoughts of consolidation have been ditched in the wake of Mena unrest. We thus expect expansionary fiscal policies will prevail, offsetting the small consolidation apparent in Dubai’s 2011 budget,” Samba said.
“As well as increased investment in infrastructure, spending will also rise on salaries, pensions and subsidies. The current high oil prices, and hence revenues, backed by Abu Dhabi’s large external savings, provide plenty of room for spending increases and we expect that the UAE’s consolidated fiscal balance will remain healthily in surplus.”
Turning to inflation, the study said the rate was as low as 0.9 per cent in 2010 but expected it to climb to nearly 3.5 per cent in 2011 and 4.5 per cent in 2012. It noted that the weakness in rents has been the main factor containing the overall consumer price index, as elsewhere inflationary pressures are rising. “Food prices in particular are on the increase. However, given the government’s recent promise to keep the price of basic consumption items low, we expect that the impact on inflation this year will be mitigated,” it said.
“Nonetheless, rising inflation in trading partners, some weakness in the US dollar, and higher commodity prices are likely to push up inflation in 2011.”