Strong oil prices will ally with lower expenditure to bolster the UAE’s fiscal position in 2011, with Abu Dhabi’s balance turning positive and Dubai’s budget shortfall projected lower, a key Saudi bank has said.
Abu Dhabi’s budget balance will also be strengthened by revenue from its state oil company ADNOC and return from its massive overseas assets, controlled mainly by the Abu Dhabi Investment Authority (ADIA), National Commercial Bank (NCB) said in a study sent to Emirates 24/7.
Citing official data, NCB said Abu Dhabi projected a budget a deficit of Dh84.9 billion in 2010 based on an oil price of about $60 a barrel.
It said the result appears to have been at least largely avoided due to a far higher actual oil price, which averaged above $70 last year.
The report said the gap marked a second consecutive year of planned deficit spending after an estimated Dh126.5 billion shortfall in 2009. The government had originally projected a Dh42.6 billion deficit on the assumption of a $50 per barrel oil price, the report said.
Reflecting the general nationwide thrust of fiscal tightening, Abu Dhabi government spending in 2010 was projected to fall from Dh251.7 billion to Dh207.5 billion, according to the study.
But it noted that this was in part because the government had in 2009 undertaken important exceptional measures such as injecting Dh16 billion in local banks and $10 billion of Dubai bond purchases.
The report also showed Abu Dhabi’s oil-related revenues were estimated at around Dh121.8 billion in 2009, followed by nearly Dh118.7 billion in 2010. Total budgeted revenues in 2010 were Dh122.6 billion.
“Continuing the consolidation trend of 2010, Abu Dhabi intends to balance its books this year. In reality, the fiscal position of the emirate is likely to be significantly stronger since the budget excludes revenues from important state-owned entities, including the Abu Dhabi National Oil Company,” it said.
“To date, Abu Dhabi appears to have covered its deficits through transfers from government-related entities, mainly ADIA.”
Turning to Dubai, NCB said the emirate’s 2011 budget also seeks to trim government spending with the objective of cutting the deficit from Dh six billion to Dh3.8 billion. Overall expenditure is set to fall to Dh33.7 billion, which is below the levels seen in 2009-2010, it said.
Nearly 43 per cent of this is allocated to the economic sector, which includes infrastructure, transport, and tourism, the report added.
Government revenues are projected to reach Dh29.9 billion, it said citing government figures. Of this, 61.7 per cent is due to come from fees and fines while 23.3 per cent is tax revenue.
“Unlike elsewhere in the region, the proportion of oil in Dubai revenues is a modest 8.4 per cent and an additional 6.7 per cent will be generated by investment income,” the study said.
“Dubai is planning to use bonds as the principal way of covering its deficits… although the emirate does not currently have a formal sovereign debt rating and concerns persist about the financial health of some government-related companies, Dubai’s five- and 10-year bond issues of $1.25 billion last year attracted subscriptions of $5 billion.”
As for the federal budget, NCB noted that the government in November approved a Dh122 billion budget for three years. It said the 2011 budget allocation of Dh41 billion is down on Dh43.6 billion in 2010.
“The budget effectively freezes a number of programmes, something that has generated considerable controversy, given the acute spending constraints of various government-funded organizations, notably in health care and education.”
Federal government revenues are set to total around Dh38 billion, something that would produce an unprecedented Dhthree billion budget deficit as the federal government has historically balanced its books.
According to the study, the revenue side of the federal budget reflects the multi-tier political system of the UAE. The Dh43.6 billion budget in 2010 was due to receive Dh16.6 billion of its revenues from Abu Dhabi, although the actual contribution appears to have been only Dh14.3 billion.
“The prospect of a federal budget deficit has fueled ongoing efforts to establish a federal government debt market,” NCB said.
It referred to a decision by the Federal National Council (FNC) in December to authorize the government to issue federal debt only if necessary to fund the projected budget gap. The public debt law limits government debt to 25 per cent of GDP or Dh200 billion, whichever is lower, it added.