UAE set to return to budget surplus in 2017, says Moody's

Ratings agency expects recovery in oil prices to halt deterioration in UAE's fiscal balances
UAE set to return to budget surplus in 2017, says Moody's
By Staff writer
Sat 14 Nov 2015 01:45 AM

The UAE, which is currently experiencing a deterioration in its fiscal balances, will return to budget surpluses in 2017 owing to recovering oil prices and a planned increase in production levels, Moody's Investors Service has said in a new report.

The ratings agency said it forecasts relatively modest budget deficits in 2015 and 2016, owing to the low oil price environment and given that hydrocarbons remain the backbone of the UAE economy despite diversification efforts.

Based on its oil price projections that have Brent rising to $73 by 2019 after a modest dip in 2016, the UAE government will record a budget surplus in 2017, with surpluses growing during the rest of the decade, said Steven Hess, senior vice president at Moody's.

"These deficits will not seriously affect the country's strong financial position, given the government's build-up of substantial financial assets over the past decade. Moreover, we expect the hydrocarbon sector to make positive contributions to real growth in 2015-2016 as production volume rises," he added.

Moody's said its forecasts are based on the UAE's planned increase in the volume of oil production, with capacity targeted to rise by 30 percent by 2020.

The rating agency projects an upward trend, even if this target is not fully achieved, given that the planned increase is a response to growing domestic demand for processed hydrocarbons that has so far been met with imported gasoline.

"There is a risk that, if oil prices remain lower than we now expect, the UAE's strong fiscal position could be eroded, but it can use the buffers it has built up for the time being," said Hess.

Additionally, Moody's said that the UAE sets itself apart from regional peers in its successful diversification efforts, moving away from hydrocarbon dependency and growing a competitive service sector.

Service industries accounted for 54.9 percent of nominal GDP in 2014, while the rating agency expects non-residential construction, tourism, trade and financial services to boost economic growth in 2016.

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