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Wed 22 Aug 2018 09:35 AM

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Fitch raises forecast for UAE fiscal surplus in 2018, 2019

The UAE's fiscal surplus is expected to rise to 3.2% of GDP this year on the back of higher oil price and production forecasts

Fitch raises forecast for UAE fiscal surplus in 2018, 2019

The UAE's fiscal surplus is expected to rise to 3.2 percent of the country's gross domestic product (GDP) this year on the back of higher oil price and production forecasts.

Ratings agency Fitch said it has revised its budget balance forecast for the UAE upwards from 2.1 percent.

Fitch also said its forecast for 2019 had also gone up from 3.5 percent to 3.8 percent.

"The UAE government will post fiscal surpluses in 2018 and 2019, as higher oil prices and production boost revenues. Expenditure will also rise as the government implements new fiscal stimulus programmes and supports its large pipeline of infrastructure projects, mitigating some of the oil-driven gains," Fitch said in a research note.
   
"While we expect sustained fiscal surpluses over the coming decade, we note that structurally stagnating oil revenue implies a need for the government to maintain momentum on reforms aiming to increase non-oil revenue," it added.

The research note also said the UAE is expected to expand its oil production over the coming quarters in accordance with the OPEC’s June decision to partially loosen of the OPEC/non-OPEC supply cut deal.

Fitch added that non-oil revenue will also expand at a robust pace, although with slowing momentum from 2019 on with the implementation of a 5 percent value-added tax (VAT) at the start of 2018 being the single biggest source of new non-oil revenue in 2018.

"We do not expect further big-ticket tax increases over the coming quarters, however, as higher oil prices reduce the urgency to raise more revenue, while policymakers will see to maintain an attractive fiscal backdrop, and therefore support the country’s competitive business environment," it noted.

"For this reason, we do not expect an expanded corporate taxation, which has come under discussion recently, to materialise. This will moderate non-oil revenue growth after the initial VAT-induced boost softens in 2019."

Fitch noted that while it does not expect a return to fiscal deficits over the next decade, structurally declining oil production means that non-oil revenue increases will have to be maintained.

"We remain positive that it will do so in light of the country’s continued commitment to reform and economic diversification," it added.

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