UAE Managing Oil Price Declines

The UAE has been comparatively resilient to the impact of the slump in oil prices owing to a relatively diversified economy, excellent infrastructure, political stability, and ample foreign assets.

We (IIF) expect non-oil growth to tick upward to 3.0% in 2017 and 3.5% in 2018 as fiscal consolidation eases and global trade improves. The deceleration in overall real GDP growth to 1.4% this year is due to the decline in oil production. The impact of the current diplomatic spat with Qatar is expected to have a limited impact on growth.

To achieve and sustain higher growth over the medium term, a comprehensive strategy is being prepared that aims to encourage foreign direct investment outside free zones and the energy sector and expand non-bank and capital market financing options for SMEs, which would boost private sector growth and promote diversification.

Inflation will remain subdued as the continued decline in rents offsets higher imports prices. Inflationary pressures from the introduction of the VAT in early next year will be partly offset by further declines in rents.

The UAE with a large financial buffer can afford more gradual pace of fiscal adjustment to reduce he impact of lower oil prices on economic growth. The adjustment this year and in 2018 focuses more on mobilization of non-oil revenues (including fees, excise taxes, and introduction of VAT).

Banks in the UAE are well regulated and supervised and continue to weather the effects of low oil prices and the moderation in non-oil economic activity. We expect annual credit growth to recover from 1.7% at end-2017 to about 5% in 2018. Ongoing reforms to develop the domestic capital markets will increase financing and saving options in the economy.

We do not expect a change in the exchange rate regime in the short-term. The flexibility of the labor market combined with implementation of structural reforms, would improve competitiveness without the need for currency adjustment.

Further increase in the policy rate is expected by the end of 2017, in step with future Federal Reserves moves. We also expect two hikes in 2018 by the Fed, each 25 bps, pushing up funding costs.

About Garbis Iradian

Based in Washington, D.C. as chief economist for the Middle East and North Africa Department with the Institute of International Finance (IIF), Garbis Iradian focuses his work and research on Morocco, Egypt, Lebanon and the United Arab Emirates (UAE). He received his BBA and MBA from the American University of Beirut, and his PhD in economics with an emphasis on macroeconomics and econometrics from the University of Freiburg, Germany. He is fluent in Arabic, English, French and German and has published several articles and working papers, including: “What Explains the Rapid Growth in Transition Economies”, and IMF staff paper, November 2009.