Dubai’s Economic Growth Slowed by Low Oil Prices

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The outlook for Dubai’s economy remains positive, although there’s been a deceleration in growth in some industries after the oil prices fall, observed BofA’s analysts during their most recent visit to the country. Despite the modestly slowing economy growth, Dubai’s budget is expected to register a surplus at the end of 2015, backed by improved fiscal position.

Since the start of the year, there has been a strong growth in the non-hydrocarbon sector, which is increasingly becoming a powerful contributor to Dubai’s economy – in terms of revenue and real GDP. Despite the decrease in expansion, it’s still modest and comes as a result partially of the drop in oil prices, which halved in less than six months. Also the numbers of Russian tourists has fallen dramatically and it currently represents just 5 percent of overall tourist arrivals. So, this recent change didn’t affect significantly the travel and hospitality industry – hotel occupancy is still around 80 percent, one of the highest in the region and in the world. Initially, it was expected to drop due to the opening of new hotels, as well, but this didn’t seem to have strong consequences. Meanwhile, a price correction by the end of the year in the real estate market is also expected to unfold, despite that prices have been declining for a year by now.

After budget deficits as a result of the financial crisis, 2015 will likely see a surplus with strong revenues and increased fee revenue collection. The growth of real GDP in 2015 is projected at 4%, a bit lower than the 4.6% in 2013 and the 3.1% estimated in the first half of 2014. While expenditures will rise by 9 percent on an annual basis, revenues will increase by 11 percent from last year to AED 41 billion. According to data by Dubai Department of Finance, the government debt fell by 3 percent from the previous year at the end of 2014 after partially repaying sovereign maturities.

The emirate is expected to handle refinancing issues, at least in the near term. The prepayment of the 2015 maturity of Dubai World debt and the Borse Dubai US$2.2bn LSE stake sale were positive signs, although 2016 may turn out more challenging as cUS$6bn worth of restructured debt is coming due.

Abu Dhabi, on the other hand, continues with its massive fiscal spending because it has launched important strategic projects – a policy of prioritizing and rationalizing, however, is taking place. This is required to tackle decreased revenues after the drop of oil prices. But as large projects such as the $20 billion nuclear power program for 4 nuclear reactors at Barakah by 2020 remain active, they will boost non-oil economic activity.

The long-awaited agreement with Iran is expected to offer many opportunities to the UAE as the two countries have been traditional trade and business partners for decades. However, there are concerns about how Iran’s oil supply will influence prices, in combination with higher OPEC deliveries as a whole. Saudi Arabia, which is the world’s largest exporter, is also maintaining its increased production and low prices in order to keep its market share. As a result, oil prices are expected to remain low, which will affect a number of countries, including the UAE. Still, the role of Iran is a matter of debates.

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