WTI is expected to average $63 per barrel (/b) in 2019, said the Global Outlook for H1 2019 by Indosuez Wealth Management, the global wealth management division of Crédit Agricole.
“Turning now to the UAE, we have already pointed to the slightly better public debt outlook when compared to the Saudi case. The implementation of new taxes such as tourism fees, custom duties, and VAT should alleviate the Emirates’ dependency on energy prices. Notably, the IMF expects the UAE to deliver a primary surplus from 2018 on,” the report said.
“However, in terms of monetary policy there is not much divergence due to the peg of each currency to the USD. With the Federal Reserve (Fed) getting more restrictive and proceeding with several (two, in our forecast) Fed funds interest rate hikes next year, the central bank of the UAE had to adopt a tightening bias. This far, the bank has raised its repo rate to 2.5 per cent, from 1 per cent at the beginning of 2017, in six steps of 25 basis points.
“Higher interest rates obviously do not help the real estate market. Prices of residential properties declined by 18.9 per cent between the November 2014 high and September 2018. In Dubai prices fell by 20.8 per cent between October 2014 and September 2017. On top of the direct impact on the sectors of construction and real estate, which weighed 13.4 per cent in the UAE’s GDP in 2017, there is an indirect effect on consumption due to the negative wealth effect at play. Curiously, while consumer confidence, as measured by the Bayt.Com index, has never been able to recover from its sharp decline from the end of 2012, the propensity to consume index did not reflect a significantly lower appetite for spending.
“Similarly, the Market Purchasing Manager’s Index remained firmly in expansion territory, that is above the 50 boom/bust line: at 55 in October 2018 it is close to its long term average of 55.1. However, the advent of protectionism did take its toll. For example, cargo volumes handled at Dubai’s airport have been threading water, increasing by a meagre 1.9 per cent year-on year in September 2018. Tourism, another pillar of Dubai’s economy, did not expand that much and Dubai International Airport passenger traffic declined by 0.2 per cent between September 2017 and September 2018, extending a downward trend which started back towards the end of 2015. All in all, real GDP growth should be positive this year, but not outstanding.
“Inflation in the UAE spiked to 4.8 per cent year-on-year in January 2018, due primarily to the introduction of a 5 per cent VAT rate, but has since begun to ease. The September figure stood at 3.1 per cent year-on-year only. It looks like the rate of change in consumer prices will moderate further in the coming months and the IMF expects UAE’s inflation rate to average 3.5 per cent this year before easing to below 2 per cent.
“All of this does not seem to be enough to change the debt outlook as assessed by the various rating agencies. As a reminder, the current Moody’s rating applied to Abu Dhabi long-term debt is Aa2, which means that the bonds are “judged to be of high quality and are subject to very low credit risk,” the report concluded.
“An impressive reduction in Saudi Arabia’s budget deficit occurred during the first 9 months of 2018, which happened despite a 25 per cent increase in government spending. This is linked on one side to the rise of the oil price as the West Texas Intermediate (WTI) price has averaged $67 per barrel so far in 2018 compared to $51 per barrel in 2017. On the other side, non-oil income also increased dramatically. According to the government this “reflects the effectiveness of economic reforms and fiscal measures targeting fiscal sustainability as well as the effective management of public finances,” the report said.
“The government is targeting a fiscal deficit of 7.3 per cent of GDP this year and a balanced budget by 2023. According to the International Monetary Fund (IMF) estimates, a WTI oil price close to $88 per barrel would be required to balance the 2018 budget.
“Despite this deficit reduction, the debt-to-GDP ratio is set to rise over the coming years. Given a 3.3 per cent weighted average coupon for Saudi bonds, and a 2017 debt-to-nominal GDP ratio of 17.1 per cent, the cost of servicing the debt amounts to $3’875 million (3.3 per cent x 17.1 per cent x $686’738 million) per year. Deducting this amount from the 2018 projected total deficit ($52 billion) gives us the primary deficit, that is roughly $48 billion, or 6.7 per cent of GDP. With such a deficit, even the 17.8 per cent year-on-year (YoY) nominal GDP growth recorded in Q2 2018 is not high enough to stabilise the debt-to-GDP ratio. The latter could reach 24.2 per cent by 2023 (IMF Fiscal Monitor, April 2018).
“We also note that the weight of debt in percent of GDP, close to 20 per cent, is not very different from that of its regional peer, the United Arab Emirates (UAE). However, in contrast, the UAE’s debt-to-GDP ratio is on a stabilising path. That being said, Saudi Arabia’s government has been trying to reduce its dependency on oil revenue. Amongst the various measures to rebalance its budget it introduced a 5 per cent VAT on 1 January 2018. It was no surprise that this plan had a negative impact on the business climate in the non-oil sector, as can be seen in the sharp decrease in the Purchasing Managers Index (PMI) to an all-time low of 51.4 in April 2018.
“Nevertheless, the PMI managed to stay above the 50 boom/ bust line, and rebounded to 53.8 in October 2018 (Chart 10). Obtaining the most up-to-date assessments of growth requires more frequent indicators than quarterly GDP figures alone (for example oil prices, ATM withdrawals, etc.). Using these variables we now expect nominal GDP growth to slow down somewhat following the strong Q2 figure.
“With regards to inflation, it is still impacted by the introduction of VAT earlier this year and in September the CPI increased by 2.1 per cent YoY. This base-effect will dissipate next January. To sum up, the most recent Saudi data suggests some kind of stabilisation, but resisting the temptation to re-expand government spending in line with higher oil prices will remain a challenge,” the report concluded. – TradeArabia News Service
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