The UAE's budget balance will return to surplus by 2019, owing to the recovery in oil prices, the introduction of new taxes - most notably the value-added tax in 2018, according to a new research note.
Analysts BMI said capital expenditure will drive total spending over the coming years, but will pose no threat to fiscal sustainability.
The research note said the UAE's fiscal situation will continue to improve over the next few years, with the budget to return to surplus by 2019.
"Greater economic diversification compared with the rest of the Gulf Cooperation Council has made the UAE less exposed to the slump in oil prices since H2 2014," BMI noted.
BMI forecast the budget deficit to shrink to 0.7 percent of GDP in 2018, down from a projected 1.6 percent in 2017, and to return to surplus in 2019.
Higher oil prices will boost government revenues in the UAE, notably by supporting the hydrocarbon revenue of Abu Dhabi - where the majority of oil production is located.
The research note added that the government will also continue to target non-oil sources of revenues. An excise tax on tobacco and sugary drinks was introduced in October 2017, and the introduction of a value-added tax (VAT), planned for January 2018, "will also be positive for the UAE's fiscal position", it said.
"The UAE is set to benefit the most, across the GCC, from the introduction of the VAT, given its larger consumer base and significant retail activity. As we see room to increase the VAT rate from the initial 5 percent level over the coming years, this could continue to support non-hydrocarbon revenue growth," it added.
On the expenditure side, BMI said it sees modest room for further consolidation, with the UAE having already significantly rationalised spending in recent years. The UAE has already cut fuel, water and electricity subsidies since 2015.
Over the next two years, BMI said it expects the government to fund its modest deficits through domestic and international debt issuance.
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