UAE in 2011: a bigger and wealthier economy

The UAE is entering 2011 with signs of full recovery from the clutches of the 2008 global fiscal distress, with its economy gaining more ground and its coffers getting fatter. This means public spending will remain high and could in turn tempt the private sector to resume its normal investment activity.

Such developments are an indication there will be more business opportunities and more hiring by the private sector. A New Year government gift involving the annulment of the six-month labour ban will open new horizons for expatriates seeking to switch to another job and this could trigger competition among employers and consequently lead to higher wages.

“We will see growth in all sectors next year, including banks, real estate and tourism…..the industrial sector is expected to record high growth following the approval of the small and medium enterprises (SME) law during 2011,” said Mohammed Al Shihi, director general of the Ministry of Economy.

With oil prices expected to average higher in 2011 than in 2010 and with the UAE’s crude output projected to rise because of recovering global demand, the country will earn more next year although its income in 2010 climbed to its second highest level since it began pumping crude 50 years ago.

 
Oil income

The UAE is expected to have earned around $65 billion from oil sales in 2010 compared with nearly $50 billion in 2010 and the income is forecast to top $70 billion in 2011. This will have a direct impact on its current account and in turn on its overseas assets, controlled mostly by the Abu Dhabi Investment Authority (ADIA), believed to be the world’s largest sovereign wealth fund.

Western independent estimates show ADIA’s assets, concentrated in the US and other industrial countries, climbed to nearly $390 billion towards the end of 2010 from around $360 billion at the end of 2009.

The report by the Washington-based Institute for International Finance showed the assets could surge to a record high of $416 billion at the end of 2011.

IIF’s forecasts about the UAE economy showed real GDP could rebound by around 3.3 per cent in 2011 compared with 2.2 per cent in 2010. The projections are close to those by the IMF, which put growth at 3.2 per cent next year.

The IIF report showed the non-oil sector would drive growth in 2011 as it would expand by about 3.5 per cent against oil sector growth of 2.6 per cent.

The country’s exports of crude oil, gas, petrochemicals and other oil products could rise to nearly $92.6 billion next year from $88.2 billion in 2010. The rise is expected to widen the current account surplus to nearly $17.2 billion or around 6.4 per cent of GDP from $14.9 billion or 5.9 per cent of GDP.

 
High spending

The report expected public expenditure to remain high in 2011, standing at around 31.3 per cent of GDP compared with 32.8 per cent in 2010. Analysts said spending levels could be higher in 2011 due to a rise in nominal GDP.

The UAE boosted public spending to its highest ever level of Dh289 billion in 2009 despite a sharp decline in oil revenue because of lower prices and production, according to the Arab Monetary Fund (AMF).

The 2009 expenditure was way above the 2008 spending of Dh254 billion although oil prices in 2008 were nearly 58 per cent higher than in 2009, the Abu Dhabi-based AMF said in a recent study.

In is report on the country’s consolidated finance account (CFA), which comprises the federal budget and spending by each emirate, the AMF cited official UAE government figures as showing revenue in 2009 plunged to around Dh292.6 billion from a record high of Dh450.3 billion in 2008.

It said the decline was a result of a sharp fall in hydrocarbon export earnings to nearly Dh217.5 billion last year from a peak of Dh362.1 billion in 2008.

“Despite the sharp fall, the UAE consolidated finance account recorded a surplus of around Dh3.5 billion in 2009…this is compared with a record budget surplus of nearly Dh197 billion in 2008,” the report said.

It noted that heavy expenditure had offset the large decline in the oil sector, adding that the UAE’s real GDP slipped by only around 0.7 per cent in 2009.

“The decline followed growth in the real GDP of around 5.1 per cent in 2008…inflation in 2009 also sharply dropped after peaking in 2008.”

 
Economic growth

Analysts agreed that high spending, part of counter-crisis fiscal expansion measures, was the main driver of growth in the non-oil sector in 2009, adding that this enabled the country to offset the downward pressure of the crisis.

“Growth this year and next year will again be fuelled by heavy spending and the improvement in oil prices…growth could have been higher but it has been stifled by the sharp slowdown in bank lending to the private sector,” said Ziad Dabbas, a financial adviser at the government-controlled National Bank of Abu Dhabi.

In comments last week, UAE Minister of Economy Sultan bin Saeed al Mansouri said the country’s nominal GDP could hit Dhone trillion this year to maintain its position as the largest Arab economy after Saudi Arabia.

He gave no forecasts for 2011 but the IIF figures showed there will be a further expansion in nominal GDP on the back of higher crude prices and output.

IMF data showed the UAE’s oil production was expected to have risen by around 100,000 bpd to 2.4 million bpd in 2010 and could swell to 2.5 million bpd in 2011.

Despite high public spending and GDP expansion, inflation is forecast to remain relatively low at around 2.5 per cent in 2011 compared with two per cent in 2010. The level is far below the record high of 12.3 per cent in 2008.

Although the UAE could spend more in 2011, the budget is expected to record a surplus of around 3.7 per cent in 2011 against a deficit of 2.7 per cent in 2010, according to the Washington-based IMF.

It projected the UAE’s total exports of goods and services to swell to nearly $238 billion next year from around $220 billion in 2010. Imports are forecast to increase to nearly $216 billion from $197 billion, allowing the UAE to maintain its position as the largest importer in the Middle East.

The IMF also expected the UAE’s gross official reserves, including gold, to grow to nearly $39.7 billion at the end of 2011 from $35.3 billion at the end of 2010.

 
Investment

After a sharp fall in 2009, foreign direct investment in the UAE is also expected to recover in 2010 and 2011, according to an official Arab group.

FDI flow into the country slumped by nearly 71 per cent in 2009 after climbing to one of its highest levels in the previous years but it is projected pick up, said the Arab League’s Inter-Arab Investment Guarantee Corporation (IAIGC).

From about $4 billion in 2009, FDI flow into the UAE could edge up to nearly $4.1 billion this year, the Kuwaiti-based group said.

“FDI in the UAE is expected to rise this year after a sharp fall last year…there will be stability and even better flows in the next years with the enforcement of the new corporate law which will ease ownership restrictions on foreign investors and could give them 100 per cent ownership in some projects,” it said.

“Another positive factor is the gradual recovery of the real estate sector, which has recorded a sharp downturn since the eruption of the crisis…this will be supported by the emerging vast investment opportunities as a result of the government’s plans to carry out large infrastructure projects.”

The UAE has emerged as the largest Arab FDI recipient after Saudi Arabia, attracting nearly $73.5 billion over the past four decades.

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