UAE to grow 4.4% in 2011

Strong oil prices will ally with high public spending to boost the UAE’s real GDP by around 4.4 per cent in 2011 while its fiscal and current account balance will record large surpluses, according to a key Western financial centre.

Growth this year is higher than the 3.2 per cent increase in the GDP of the second largest Arab economy but growth is projected to slow down to around 3.1 per cent in 2012 as a result of an expected fall in crude prices, the Washington-based Institute for International Finance (IIF) said.

Releasing its semi annual report on Arab economies, the IIF forecast a 6.7 per cent growth in the combined GDP of the six-nation Gulf Cooperation Council (GCC) in 2011. But it expected a contraction in Arab oil importing nations.

The report put growth for all Arab oil exporters at 6.5 per cent this year but it excluded conflict-battered Libya, which could see a massive decline of nearly 56 per cent in its GDP because of the disruption in its oil supplies.

“The divide in economic prospects between oil exporting and non-oil exporting Arab countries continues to increase,” said IIF, which groups more than 450 financial institutions from over 70 countries.

“While the oil-exporters are likely to see average growth of 6.5 per cent this year, the Arab oil importing countries will see their economies contract on average by 0.4 per cent…the transitions from authoritarian regimes as a result of the ‘Arab Spring’ are proving to be most difficult for some countries.”

IIF Senior Counselor and Director for the Middle East and Africa George Abed said it is critical that the transition authorities in unrest-hit countries place a high priority on deepening and accelerating structural economic reforms.  Among the populations of countries such as Egypt, Tunisia, Jordan and Morocco, expectations are that change will bring about a revival of growth that will be more widely shared, improved job opportunities and in general, a better standard of living, he was quoted by the report as saying.

The report said the better economic performance in hydrocarbon-exporting countries is due to higher oil and gas production and large increases in government spending. It expected that higher oil prices and production levels would help lift the budget revenues from hydrocarbon exports from $554 billion in 2010 to $793bn in 2011 before slipping to around $725bn in 2012.

The combined external current account surplus is projected to rise from $170bn in 2010 to $322bn in 2011, but then decline to $225bn in 2012. Gross foreign assets of the GCC are projected to rise to about $1.9 trillion against foreign liabilities of $0.4trn, the report showed.
By contrast, the report stated that the Arab Spring, which flowered at the start of 2011 into popular uprisings to take down authoritarian regimes across several countries in the Arab region, has run into serious difficulties. 

While transitions in Tunisia and Egypt remain peaceful, earlier hopes for a quick passage to a more democratic future have dimmed as the process of political transformation was found to be more complex and uncertain, the report said.

“At the macroeconomic level, there is an urgent need to articulate a credible medium-term reform and stabilization framework. Given the relatively large size and low productivity of public sectors in the region, the reform agenda would need to focus on reforming state institutions and policy frameworks and creating the legal and institutional environment for fostering entrepreneurship, investment, and market-driven growth,” Abed said.

“Fiscal deficits are already high and in some cases unsustainable, and care must be taken not to raise government spending until higher revenues are secured and reforms take hold.  While external debt levels are not particularly high, any external support must be channeled to investment rather than consumption.”

The report expected real GDP in the non-oil exporting countries to recover to 2.3 per cent in 2012, underpinned by a modest recovery in investment. 

It said that oil importers would continue to face limited fiscal room and rising borrowing costs. The report projected the combined gross external financing need for Egypt, Jordan, Morocco and Tunisia at about $35 billion for 2011 and 2012, adding that the main downside risk to the outlook includes difficulties in political transition, shortfalls in external support, and a weaker outlook in Europe.

Quoted by the report, Garbis Iradian, IIF Deputy Director, Middle East and Africa Department, said:“Given our projection of an average Brent oil price of $97 a barrel in 2012 as compared to $109 in 2011, the combined current account surplus of the Arab oil exporters (excluding Libya) is expected to narrow from $322bn in 2011 to $225bn in 2012…. as a result, we expect to see gross financial assets rise to slightly above $two trillion. 

He added:”In general, we believe the Arab oil exporters’ financial sectors are better prepared for further deterioration in the external environment as banks’ liquidity continues to improve and deleveraging progresses steadily.”

A breakdown showed Qatar would again record the highest GDP growth rate in the region at around 18 per cent in 2011. Growth is projected at 5.8 per cent in Saudi Arabia, 2.2 per cent in Bahrain and 4.4 per cent in Kuwait and Oman.

High oil prices will also turn a 2010 budget deficit in the UAE into a surplus of 5.8 per cent of GDP while its current account surplus is forecast to more than double to about $49bn this year from $24bn in 2010. The report expected the current account surplus to remain as high as $43bn in 2012.

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