The recent fall in oil prices and with the signs for another global slowdown on the horizon, there is scepticism about the state of UAE’s economy. The Middle East famously dependent on oil as a major source of income is facing major fears of reduced incomes from oil exports. Fortunately, this won’t be the case. Experts predict that with continuing investments in extensive public assets, combined with smart diversification of economy, UAE’s economy will remain robust and not be swayed by the swings due to oil prices crashing or the impending global doom.
Let’s see if the UAE’s economy will remain stable and resilient and how.
The resounding verdict is that the UAE economy will remain stable in the face of impending changes in the oil prices and the global doom.
Now, let’s get back to understanding the why and how part of it.
In a very simple equation, the crude oil prices are directly related to the strength of the US dollars. This leads to major upheavals in the international market being directly linked to the actual raw materials’ production and supply rates. Also, traditionally, the region is part of the OPEC countries and is a known oil cartel trading country. Given conventional logic, there is cause for concern, then why are pundits lauding the UAE economy as safe from volatile swings in the oil prices.
The primary reasons include massive fiscal consolidation, limited fiscal deficit and the country’s safe haven status. Dr Garbis Iradian, the chief economist for Middle East and North Africa, associated with the Institute of International Finance said that the growth in the UAE will moderate to about three per cent in the year 2015-2016. That is not a very bad growth statistics projected. What is turning the game completely for the UAE is that the fiscal adjustments are being changed by removing fuel and electricity subsidies as well as non-priority spending from government spending. This means that the spending from the government side will be significantly reduced, current account surplus will be reduced, thanks, to spends and lessening oil price. And, though it will be reduced, it will still remain sizeable and the UAE’s status as a major exporter of capital will be maintained.
Fiscal adjustment will be tough because of regular and steep decline in oil prices and at the same time, governments are keeping a tight check on the fiscal policies which in turn, lead to weaker growth. In the short-term, due to solid banking, this will be kept in check though the liquidity conditions are being tightened and rates have risen.
As a short-term measure, the large current account surplus is being dipped into, thanks to the tough fiscal policies being undertaken. A part of the fiscal deficit is being financed by liquidating some of the official reserves and borrowing from local banks that are liquid.
In the face of it, the UAE economy will remain strong and unaffected by the oil price swings; though the long-term effects can only be gauged, depending on the duration that these prices remain low or dip even further!