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Sat 4 Feb 2017 11:17 AM

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Abu Dhabi set to slow down spending cuts in 2017, says Fitch

Ratings agency says it expects government deficit of 5.9% of GDP in 2017, nearly unchanged from 2016

Abu Dhabi set to slow down spending cuts in 2017, says Fitch

The pace of fiscal adjustment in Abu Dhabi is forecast to slow in 2017, after large spending cuts in 2015-2016, according to Fitch Ratings.

The ratings agency said in a research note that it expects a government deficit of 5.9 percent of GDP in 2017, based on Brent crude averaging $45 per barrel, nearly unchanged from 2016.

In affirming Abu Dhabi's long-term foreign and local currency issuer default ratings at 'AA' with a stable outlook, Fitch said that Abu Dhabi's total spending could edge up by 3 percent in 2017, having contracted by 10.3 percent in 2016 and 18.1 percent in 2015.

Spending in 2016 is estimated to have been above budget. Non-oil revenue targets have been scaled back and will now be met largely by dividends from state-owned and government-related enterprises, it added.

Fitch said the emirate's hydrocarbon revenues have the potential to exceed forecasts, reducing the urgency for new policy measures.

"In 2018, we expect the government budget to post a surplus of 1.5 percent of GDP, as Brent recovers to $55/barrel and the introduction of VAT yields around 0.5 percent of GDP," tshe statement said.

"New taxes on hotel stays and rents paid by non-nationals were introduced in 2016 but the fiscal effect of these will be small. Earlier liberalisation of fuel prices and hikes to utility prices should help rein in the subsidy as oil prices recover," it added.

Fitch said it estimates that non-hydrocarbon growth slowed to around 3.5 percent in 2016 from 7.6 percent in 2015, reflecting lower public sector demand, weak economic sentiment, tighter banking sector liquidity and effective exchange rate appreciation.

The agency expects non-oil growth to pick up to 4 percent in 2017 and 4.5 percent in 2018 as consolidation eases and oil prices recover.

In its forecast, the government faces a fiscal financing need of 11.8 percent of GDP in 2017 and 4.6 percent of GDP in 2018 - assuming that the government finances the deficit excluding income from Abu Dhabi Investment Authority (ADIA).

ADIA's assets are not officially disclosed, but Fitch estimates that strong returns helped propel their value to $639 billion in 2016, from $627 billion in 2015. Fitch expects the value of ADIA assets to be little changed by end-2018 as investment returns would offset drawdowns for financing.