IMF Estimates a 2.3% Fiscal Deficit for UAE in 2015

In contrast to private-sector predictions, the International Monetary Fund (IMF) forecasts the United Arab Emirates (UAE) will experience a 2.3% financial deficit.

The UAE’s Government budget deficit has been anticipated due to the decrease of oil prices. It is the first time since 2009 that the UAE will experience a shortfall in the Government Budget. During the previous year, oil cost approximately $100 per barrel whereas this year, oil has slumped to approximately $60 per barrel.

The IMF predicts that the UAE’s Gross Domestic Product (GDP) will drop by 2.3% in comparison to the 5% surplus it experienced in 2014. The IMF also forecasted that the UAE’s non-oil based sector economic growth rate will increase by 3.4% while inflation rate is also expected to rise by 3.8% due to increased rents regardless of the fact residential prices have stabilised in Dubai. A complete IMF report will be released during the following month which will include all of its forecasts.

Additionally, according to IMF the UAE’s economic growth rate will increase by 3% during 2015 marking a drop of 1.6% in comparison to the previous year’s growth rate which was recorded at 4.6%. On a bright note, the IMF commended the UAE government on continuing to invest on infrastructure as well as implementing innovative policies which eased the negative impact of decreased oil prices. 

Numerous economic predictors within the private sector have forecasted that the UAE will experience a higher shortfall than the 2.3% predicted by the IMF. Even though the IMF has made its predictions based on the UAE’s expenditure plans, it does not mean that its predictions are more precise than those of the private-sector due to the fact the IMF does not take into consideration future oil prices.

Abu Dhabi Commercial Bank predicts the UAE will experience a 4% fiscal deficit during this year. The forecasted deficit is viewed as modest in comparison to the country’s large financial reserves. According to the bank, due to the government’s policies and reforms implemented during the past few years the UAE’s non-oil GDP rate will remain healthy.

Additionally, the government’s focus on housing, transportation, tourism, healthcare as well as education and energy projects in Abu Dhabi and Dubai will support and sustain the UAE’s economy

Although the IMF commended the UAE government for its innovative policies and budget spending it has made some suggestions so as to help regulate the deficit. According to the IMF, the UAE government must sustain investment spending, ease off on subsidies, regulate the public wage bill, increase non-oil profits and minimise transfers towards state-linked entities.

Most of the aforementioned measures are currently being endorsed. The IMF also calls that the financial community of the UAE and the government to be more transparent especially concerning state-linked entities as well as state debts.

According to an Abu Dhabi-based investment company, the National Investor, the UAE’s spending patterns and reforms rely on whether the price of oil will even out or fluctuate. In the past, the UAE government was practical and sensible as it restricted government spending at times when oil prices dropped. In contrast, the UAE government has not followed the same tactic this time and carries on spending. The reason remains unclear as to whether it is due t the fact the state believes oil prices will pick up or whether due to the fact it has implemented new reform policies.

Currently, the UAE government has large amounts of reserves to manage the drop of oil prices as well as to deal with the small shortfall in its budget. However, if oil prices remain low, the government will have to make long-term plans and introduce new policies as a precaution.

The IMF reflects the same views and will include details concerning the UAE’s spending in its report in the following month.

Foreign Labor Influence on the UAE Economy

The United Arab Emirate (UAE) dependency on foreign workers is a subject that dominates any discussion concerning the UAE’s economy. This fact implies that in the occasion that foreign workers depart from the UAE, its economy would be influenced negatively. Some do not realize that an economy is influenced by a variety of important features, not only the labor force.

This article will outline the relation between the economy and foreign labor and to what extent the latter influences the UAEeconomy and its economic growth. The economic cycle of 2002-2012 was quite eventful. The UAE’s economy started to thrive in 2003 where it reached its peak in 2006. After 2006, the UAE’s economy went into a crisis until it finally returned to normal by the end of 2012.

Population Growth

During 2002-2012, the population rate of the UAE seems to follow its economic growth rate, whereby population reached its peak in 2007 and then dropped rapidly to just above 0%. This reveals that the percentage of labor relies on the economy, which is more logical since an economy draws foreign workers as it develops and expands. At times when the economy experiences downfalls, foreign workers decrease.

Emiratis and UAE Residents

A country’s Gross Domestic Product (GDP) per capita is more during times whereby the economy expands and thrives. In reference to the UAE’s GDP, statistics show that following the international financial crisis, the country’s GDP dropped by 40% only to jump up again in 2004.

The above trend reveals that as the UAE expands, foreign labor supports the growth by being employed in positions. Confined labor policies smother the UAE’s economic growth since these restrict the supply of employees. This is especially the case in the UAE’s knowledge-based segments.

On the other hand, during times where economic growth declines or even is in crisis, the workforce adjusts automatically and evens out the GDP. Due to the fact that foreign workers are able to save large proportions of their income during the time where the economy expands as well as the fact workers are not subject to Income Tax means that they have enough saved to use in times when economic growth declines. Overall, foreign workers are interested in working in the UAE until its GDP becomes stable. 

On the other side, during recessions all public services experience budget cuts. This does not necessarily mean the public services sectors do not offer high quality because during recessions, there are less people to cater to so the quality of the services remains the same.

The same supply and demand trend applies in the private sector of the economy. There is less supply which matches with consumers’ decreased demand. Imagine there are 10 opticians throughout the country and people cannot afford to spend money on examining their eyes and purchasing glasses. Thereby, 5 of these opticians leave the country, which means the 5 remaining opticians sustain their business activity and quality of services. In basic terms, the workforce adjusts automatically to the demand and supply of the economy. 

Dubai’s economy growth increased in 2014

Dubai’seconomy grew by 3.8% in 2014 according to Dubai Statistics Centre (DSC). Dubai’s real Gross Domestic Product (GDP) marked AED338 billion by the end of 2014. Dubai’s government officials commend and congratulate the city’s excellent economic performance. According to Dubai’s government, the city’s economic growth is attributed to its diversified economy.

According to the DSC’s report, all Dubai’s economic sectors developed in the previous year leading to increased growth rates, which consequently led to an increased GDP. Government officials assert that Dubai’s increased economic growth reveals that the emirate’s non-oil based sectors are also marking continuous growth. T according to the statistics, the emirate’s non-oil based economy contribution increased by 98.7% during 2014. In fact, Dubai’s oil-based sector contributed an amount of AED4.4billion whereas its non-oil sector’s contribution amounted to AED333.5billion.

These statistics confirm that Dubai’s overall economic diversification, whereby the city focuses on both service and industrial activities, is paying off.  The statistics also showed that 34% of Dubai’s GDP is attributed to the emirate’s communication, storage and transport sector that developed greatly from 2013 to 2014, marking an increase in growth rate of 8.6%. 

New index Measures Dubai’s Economy

According to the new index, Emirates NBD Dubai Economy Tracker, implemented to measure Dubai’s the economic growth rate of its non-oil sector; the emirate marked a slight decrease during April.

The new index was officially introduced by the emirate’s banks a few days ago, and it said to cover more than 600 companies within Dubai’s private sector. The purpose of the index is to measure the performance of Dubai’s private non-oil based sector on a monthly basis.

Dubai’s new index is founded on the Purchase Manager Index, which has been adopted by a variety of other countries. According to Markit, the assembler of the index, all of Dubai’s private companies, regardless of size, will be monitored in order to measure the emirate’s economic growth. The aim to create a precise and accurate picture of the performance of Dubai’s non-oil based economy.

Besides measuring Dubai’s economic performance, the DubaiBusiness Activity Index also records the emirate’s employment rate. According to the index, Dubai’s employment rate dropped slightly from March to April from 60.6 to 57.2 respectively. However, even though the employment rate dropped, it is still above 50.0 indicating the emirate’s economy is expanding rather than contracting.

The index has revealed that although the slight slump Dubai has experienced, its private sector growth rate is resilient and strong when compared to other international economies. It must also be taken into account that the emirate’s economy remains strong regardless of the drop in oil prices that has influenced other oil-based economies.

The Real Estate Tracker results also reveal that Dubai’s property market will experience a slight strengthening. The tracker, which measures the rate of growth of the emirate’s property market, is conducted every two months. The tracker surveys around 600 domestic properties and 70 real estate agents. According to the property tracker, property values will show a small increase in value as well as demand. 

Dubai Economic Growth and Services Sector

Dubai’s services sector is vital to its economic growth as the city is improving and updating its systems by using digital technology. According to Oxford Business Group (OBG) report, Dubai’s intention to increase its tourism is clear, as 2020 Expo is in the horizon, offering countless investment opportunities for investors interested in the hospitality sector and other intertwined infrastructure and sectors. 

While the city’s efforts to recover from the devastating 2009 financial crash are paying off, Dubai’s role as a regional hub is further attracting investors thus increasing capital flow.

Factors that will contribute to Dubai’s Future:

1. Dubai has upgraded

The MSCI upgraded the UAE from frontier to emerging market in 2014, which has led to increased liquidity. At the same time, it is anticipated that an improved trading platform will lead to a greater interest amongst companies that are considering registering. Financial experts believe that the upgrade will aid the UAE attract companies outside the UAE borders. Finally, in 2014, Dubai also raised an equity capital, marking the city’s first offering over a period of five years.

2. Public Offerings

Dubai has planned numerous projects for the upcoming 2020 EXPO including the launching of an Initial Public Offering (IPO ) pipeline. Reevaluated rules and regulations involving listing and resilient prices of the stock market will also contribute as to when precisely the IPO pipeline will be launched. On a bright note, the fact that Dubai’s government has set as priority to strengthen the city in order to become a stronger regional financial centre as well as vigorously progressing with infrastructure plans are both promising factors that will attract investors in purchasing sukuks (Islamic bonds) and equities.

3. Real Estate

Dubai’s construction sector has increased overall contributing 8% to the city’s GDP in 2013, which is a rate well below the 14% increase marked in 2008, which led to the financial crash. Construction loans marked an increase of 40% at the end of 2013, reflecting construction companies’ restored confidence in the real estate market. Statistics revealed that the 40% loan increase was the highest increase since mid-2009.

4. Public-Private Partnership Collaboration

Dubai’s construction market is anticipated to benefit immediately by the emirate’s plans to implement a public-private partnership (PPP) model, which is further encouraged by the government’s vision and plan for getting all its projects on the internet. By presenting PPPs, Dubai intends to attract funding for new and huge business ventures, particularly for residential as well as public ventures. The legislation framework is presently being revised and drafted. If the PPP model is accepted and introduced, it will be the second model in force throughout the Gulf region.

5. Green Economy

Dubai has marked energy saving as its top priority. Dubai Integrated Energy Strategy (DIES) strives to decrease its energy consumption by 30% until 2030, as it intends to make smart use of water and electricity. Additionally, the newly founded Dubai Energy Agency (DEA) aims to increase efficient use of energy by advising consumers, industries as well as the government.

Dubai- India ties

A delegation from Dubai visited India, Mumbai with the intention of discussing new investment opportunities in order to enhance the two countries economic relationship. Dubai’s main intention is to strengthen Dubai-India trading ties.

The Dubai International Financial Centre‘s (DIFC) delegation, made a number of presentations and discussed the idea of implementing and developing Dubai’s position as a competitive business jurisdiction. The delegation noted that the two parties, India and the UAE, have developed a strong foundation thanks to their long and fruitful collaboration and that it is time to make their relations stronger by investing in areas both countries have interest.

The DIFC is not only interested in attracting skilled employers and industry expertise, but also to invest in investments that will eventually generate and establish effective commercial, investment and economic allies.

The DIFC delegation was attended by nearly 50 potential as well as existing clients who were interested in the DIFC’s effective regulatory structure, infrastructure as well as legislation framework.

The DIFC has benefited by the visit to Mumbai as many potential clients have shown their interest including investment banks, banks, insurance and reinsurance brokers and providers. Additionally top India-based firms also expressed their interest in setting up in the UAE to expand in the Middle East and Africa.

Pension, longer visa for Dubai expats proposed

Dubai’s financial and economy experts are supporting the idea of introducing new policies concerning longer duration of visas, sponsored free visas for expats as well as the implementation of a pension system.

According to experts, by loosening expat policies, Dubai will ultimately draw higher levels of both investments and human capital, which will increase domestic spending and maintain economic growth.

Dubai’s governance and Deloitte formed the Dubai Economic Council (DEC), which has drawn up a report that outlines policy suggestions that will help the emirate enhance its competitiveness and maintain economic growth. 

Every year large amounts of expatriate incomes leave the United Arab Emirates (UAE), therefore the DEC’s report outlines policies that aim to reserve these funds within the country. The DEC proposes that Dubai introduces a government pension scheme targeted towards skilled expats, issue longer visa durations as well as grant free-sponsored visas to certain skilled professionals.

Consequently, expatriates would remain within Dubai for a longer period of time and invest their money domestically and not in foreign countries. Based on statistics taken from the World Bank in 2011, 40%-50% of expatriate incomes were sent abroad. Additionally, at present the duration of visas issued last for two to three years.

The DEC report outlines that by granting expatriates with visas that carry a longer lifespan Dubai would benefit immensely because expatriates would remain in the UAE longer, thus consumer expenditure and home investments would rise. The DEC proposes that Dubai follow the example of other countries like Singapore where expats are granted visas that last for ten years.

Moreover, if Dubai grants visas to skilled professionals, it will allow expats to engage in part time and/or temporary work or even invest in their own businesses. By alleviating labour restrictions Dubai would attract higher-skilled workers, who in turn would transmit their expert knowledge to domestic businesses and enhance the setting up of new businesses.

The National Bank of Abu Dhabi also supports the DEC’s suggestions and believes the policies it proposed will indeed attract foreign investors but mostly will increase the number of start-ups and enhance domestic spending. Dubai is already an attractive business hub when compared to other hubs like Singapore and Hong Kong. By implementing longer visa duration, it is believed that Dubai will attract investments from Europe and South-East Asia.

Based on the Dubai Statistics Centre, the number of UAE nationals is anticipated to drop to 5% of the total UAE population between 2010 to 2020. From 2014 and onwards, statistics reveal that 30% of real estate investments in Dubai come from the GCC nationals.

Nonetheless, Dubai maintains its leading position within the Middle East and North Africa (MENA) as well as the GCC concerning features such as political stability, healthcare, quality of life, diversified strategies as well as crime and safety levels.

Overall, Dubai has developed and grown incredibly, proving that the state’s diversification strategies have worked well. Presently, the oil-based sector contributes merely 2% to the emirate’s total GDP. Additionally, the emirate provides high quality of life to its people as it was voted first within the MENA and 75^th internationally in the Quality of Living Survey conducted by Mercer in 2014.

 Dubai should now focus on enhancing its regulatory structure and competitiveness. Even though Dubai more advanced and developed than MENA and GCC markets, it is not as advanced when compared to more advanced countries.

The policies proposed by the DEC are generally supported by major banks and authorities in Dubai. If Dubai implements a state pension scheme, the state can also coerce workers to invest a proportion of the pension fund in domestic assets. Therefore, investment funds will stay within Dubai’s domestic economy benefiting both bond and equity markets stabilise in the long run.

The present dividend scheme has inadequacies regarding structure, due to the fact it is broad, complicated and corporate accounting can easily find loop holes and manipulate it.

An efficient state pension scheme should be one of the components that make up an employment package. Pension plans are also decisive factors workers take into consideration when deciding which company or employer to work for. Employees that do not have effective pension schemes risk facing financial difficulties when they have retired, except if they set up personal pension plans. Additionally, being part of a pension scheme adds a sense of security and belonging.