Moody’s paints cautious but positive picture of UAE

Moody’s late on Monday said the UAE economy was slowing but was resilient to lower oil prices.

The ratings agency said that although the UAE was “experiencing a deterioration in its fiscal balances”, the outlook was for a “return to budget surpluses in 2017 owing to recovering oil prices and a planned increase in production levels”.

Steven Hess, the senior vice president at New York-based Moody’s, said: “We forecast relatively modest budget deficits in 2015 and 2016, owing to the low oil price environment and given that hydrocarbons remain the backbone of the UAE economy. However, based on our oil price projections that have Brent rising to US$73 by 2019 after a modest dip in 2016, the UAE Government will record a budget surplus in 2017, with surpluses growing during the rest of the decade.”

The UAE and other oil-producing countries around the world are coping with lower prices for their output. Brent crude was trading at $47.68 a barrel on Monday, compared with $82.34 a year ago.

Moody’s noted that the UAE was offsetting the lower prices by increasing volume, with capacity targeted to rise by 30 per cent by 2020.

The planned increase, it noted, was in response to growing domestic demand for processed hydrocarbons that has so far been met with imported petrol.

“There is a risk that, if oil prices remain lower than we now expect, the UAE’s strong fiscal position could be eroded, but it can use the buffers it has built up for the time being,” Mr Hess said.

Additionally, Moody’s said the UAE had set itself apart from its neighbours through its diversification strategy, with a growing services sector easing the load on hydrocarbons.

Service industries accounted for 54.9 per cent of nominal GDP last year, Moody’s said, adding that it expected non-residential construction, tourism, trade and financial services to boost economic growth next year.

While the agency forecast budget deficits this year and next, it said they were not a big problem.

“These deficits will not seriously affect the country’s strong financial position, given the government’s build-up of substantial financial assets over the past decade. Moreover, we expect the hydrocarbon sector to make positive contributions to real growth in 2015-2016 as production volume rises,” the report said.

In August, the IMF said that the UAE economy was on course for a “soft landing” this year.

The fund forecast national economic growth of 3 per cent this year, down from 4.6 per cent last year, as the oil slump results in weaker real estate and corporate activity. Government spending cuts and tax increases would also drag down economic growth, it said.

Standard Chartered projects the UAE’s GDP growth at between 3.5 and 4 per cent this year, but Standard and Poor’s expects growth of just 2 per cent.

The Moody’s report did not predict a growth rate for the UAE economy.

The report also did not specifically address the agency’s rating outlook on UAE debt.

Moody’s has a rating of Aa2 stable on UAE debt. Under the agency’s definitions, debts rated double-A “are judged to be of high quality and are subject to very low credit risk”.

Follow The National’s Business section on Twitter

Share This Post