Improving oil prices and fiscal consolidation expected to drive return to surplus
Dubai: After three years of deficits, the UAE is expected to balance its budget in 2019, thanks to the fiscal consolidation efforts, the very high fiscal strength supported by historically large fiscal surpluses, according to rating agency Moody’s.
The general government fiscal balance turned into a deficit in 2015, largely due to the slump in oil prices, and deteriorated further to 2.5 per cent of gross domestic product (GDP) in 2016 despite cuts in government spending. The deficit is likely to narrow to 0.8 per cent this fiscal year and continue to improve.
“The rise in oil prices and spending controls are the main drivers behind the narrowing deficit, although non-oil revenue has increased since 2015 following the introduction of VAT [value-added tax]municipality taxes and increases in government service fees,” said Thaddeus Best, a Moody’s Analyst.
Hydrocarbon revenue represents most income at the consolidated government levels, although it has declined to 42 per cent of total revenue from around for 70 per cent in 2014. The consolidated UAE government is less dependent on hydrocarbons than Saudi Arabia, Qatar, Kuwait, Oman, or Bahrain because of higher fees on non-oil activities.
Other government revenues include profit transfers and dividends from government-related enterprises (GREs), and returns on investment income in the sovereign wealth fund, primarily the Abu Dhabi Investment Authority (ADIA). The UAE also implemented a 5 per cent VAT rate in January 2018, which is expected to increase government revenues by up to 1.7 per cent of GDP.
“As a result of Abu Dhabi’s fiscal consolidation and the recovery in oil prices, we expect the UAE’s consolidated government deficit will decrease to 0.8 per cent of GDP in 2018, from an expected 2.3 per cent in 2017,” said Best.
The UAE’s consolidated fiscal position shows a diverging path between Abu Dhabi, where broad spending cuts were enacted, and Dubai, which has continued to increase spending (particularly capital spending) ahead of the World Expo 2020.
Although government revenues remain dependent on oil revenue, Moody’s analysts expect fluctuations in oil prices to either end of their $45-65 (Dh165.28-Dh238.74) a barrel (bbl) forecast range should not change the outlook substantially.
“Given that our spot forecast is towards the upper end of our range, oil at the bottom of the range would have a greater impact, but even if oil prices average $15 below our baseline projections, we expect the UAE would run relatively small fiscal deficits below 5 per cent of GDP, whereas a $5/bbl upside surprise to the top of our range would provide small fiscal surpluses but would not allow the UAE to contribute substantially to its government asset position,” said Best.
On a consolidated government basis, the UAE’s general government debt, at an estimated $85 billion at the end of 2017, was equivalent to 22 per cent of GDP. The federal government has no traded debt. The two emirates of Dubai and Abu Dhabi account for the vast majority of the general government debt.
The majority of the UAE’s government debt load is concentrated in Dubai, which as of year-end 2017, stood at estimated $60.8 billion. Included in this is $20 billion of Dubai’s debt, which relates to the financial support from the government of Abu Dhabi during the 2009 debt crisis. This was rolled over in 2014 until 2018, and the coupon lowered from 4 per cent to 1 per cent.
Moody’s estimate Abu Dhabi’s debt increased by more than 100 per cent following last year’s $10 billion issuance. Among the Northern Emirates, Sharjah’s direct government debt reached $4.9 billion in first quarter of 2018, consisting of market borrowings in the form of three sukuks of $500 million, $750 million and most recently a $1 billion issuance in March 2018.
This is in addition to a $317 million panda bond issued in February, as well as USD-denominated bank loans from both UAE and foreign banks. Ras Al Khaimah also has $1.7 billion in borrowings.
Funding deficits through external borrowings
The structure of the UAE’s deficit financing has also evolved in the aftermath of the oil price shock, with a greater emphasis on international market issuance, according to Moody’s.
At the outset of the oil shock, most of the deficit was financed through cash withdrawals from domestic banks. However, from 2016 onwards the government of Abu Dhabi turned to sovereign wealth fund transfers and debt issuance to finance the deficit, tapping the market in May 2016 with an issuance of $5 billion in five- and 10-year bonds, and again in October 2017 with a $10 billion issuance in three tranches.
According to Moody’s, government assets are substantial and concentrated in Abu Dhabi offshore assets that support the UAE’s general government structure, starting with Abu Dhabi’s sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA). ADIA itself does not disclose its asset size or composition.
The Institute of International Finance estimates ADIA’s total assets at $577 billion (equivalent to 155 per cent of the UAE’s 2017 GDP or more than five years of general government expenditure) as of end 2017. The Sovereign Wealth Fund Institute (SWFI) has a higher estimate at $828 billion.