UAE to push ahead with public spending

Higher oil prices will strengthen the UAE's external financial position, with current account surplus growing to 6% in 2010 Samba. (REUTERS)

The UAE is expected to maintain a policy of increasing public spending to mitigate repercussions of the global credit squeeze and ensure growth in its economy, a key Saudi bank said yesterday.

Despite lower income in 2009 because of a result of the decline in oil prices, the UAE recorded a surplus in its consolidated finance account (CFA) and the balance is projected to surge in 2010, the Saudi American Bank Group (Samba) said.

In its monthly bulletin covering the UAE and other GCC states, Samba said the UAE's real GDP slipped by around 1.1 per cent in 2009 but the non-oil sector grew by nearly 1.3 per cent. Real GDP will rebound by around two per cent in 2010 because of higher oil prices and public spending, it said.

"The expansionary fiscal policy is likely to be maintained. The UAE's consolidated fiscal accounts are estimated to have posted a surplus of around two per cent of GDP in 2009 as recovery in oil prices in the second half of the year helped stem the sharp drop in oil revenues," Samba said.

"With oil prices expected to hold firm at around $75 (Dh275) a barrel in 2010, the consolidated surplus should rise further to nearly six per cent of GDP, despite likely increases in both federal and Abu Dhabi expenditures. The federal budget projects a 3.4 per cent increase and a balanced budget."

Strong oil prices over the past few years have largely widened the surplus in the CFA, which covers federal spending and the budget of each emirate. During 2006-2008, the cumulative surplus stood at around Dh200 billion, allowing Abu Dhabi to largely support its Abu Dhabi Investment Authority (Adia) assets.

Samba said the increase in oil prices this year over their $60 level in 2009 would strengthen the UAE's external financial position, with the current account surplus expanding to nearly six per cent. It said this would help rebuild external assets drawdown during late 2008 and early last year and ensure that the UAE maintains a healthy net creditor position.

It noted that the level of assets held by the UAE's various sovereign wealth funds, especially those of Adia, were not publicly revealed. But it cited estimates by the Washington-based Institute of International Finance (IIF) projecting the UAE's net foreign asset position to approach nearly $400bn during this year.

"The investment income from foreign assets alone is seen as sufficient to cover the annual debt servicing of the UAE's total debt of an approximate $165bn."

Samba's figures showed the UAE's real GDP edged down by around 1.1 per cent in 2009 after a high growth of 7.4 per cent in 2008.

It attributed the decline to a sharp fall in the oil sector, which dipped by nearly 9.1 per cent as a result of a cut in the UAE's crude supplies in line with a collective Organisation of Petroleum Exporting Countries (Opec) agreement to trim oil output to prop up prices. The decline was partly offset by growth of about 1.3 per cent in the non-hydrocarbon sector.

Samba expected the UAE's GDP, the second largest Arab economy after Saudi Arabia, to recover by around two per cent in 2010 on the back of an expansion of 2.1 per cent in the oil sector and two per cent in the non-oil economy.

"Increasing oil revenues on the back of a projected average crude price of $75 will enable the UAE authorities to comfortably increase spending and investment in infrastructure aimed at diversifying the economy," the report said.

"This will help sustain healthy growth in the non-oil sector. After a contraction last year, the dominant oil sector is also projected to provide a positive impetus, reflecting some small production gains and new investment activity. This will drive real GDP growth of two per cent for the UAE as a whole in 2010," the report added.

 

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