IMF lowers UAE growth forecast for this year and 2018 on low oil prices

The IMF has lowered its growth forecast for the UAE for this year and 2018, as low oil prices continue to impact the economy.

The fund, however, said over the medium term non-oil growth is forecast to stay around 3 per cent, thanks to higher investment in the lead-up to Expo2020. It also said the introduction of a 5 per cent value added tax (VAT) in January next year will not have a “significant adverse impact on growth".

Overall growth this year is now projected to reach 1.3 per cent, compared to its 1.5 per cent forecast in April due to a slower expansion in the non-oil economy, which will grow 3.3 per cent, compared to 3.8 per cent in its previous forecast. The growth forecast for next year was lowered one percentage point to 3.4 per cent from 4.4 per cent in April, owing to an easing of oil growth to 3.2 per cent, compared with 6.2 per cent in the April forecast.

The fund said in the report that the risk of low oil prices is affecting the economic outlook.

“Growth is projected to recover over the next few years, as the pace of the necessary fiscal consolidation eases, global trade regains momentum, and investment, including for Expo 2020, accelerates,” the IMF said. “This outlook is subject to downside risks, stemming mainly from a further sustained decline in oil prices, tighter financial conditions, a rise in protectionism and an intensification of regional conflicts.”

The benchmark Brent oil price is down 14 per cent year-to-date to US$48.91 a barrel from $56.82 a barrel at the end of last year as a global oil restraint agreement fails to dent a supply glut and amid rising production from non-Opec countries such as the United States, where share oil production is rebounding.

Opec and a group of countries led by Russia agreed to extend a six-month agreement to cut oil production that ended in June into the first quarter of next year. As an Opec member, the UAE has to adhere to the cuts.

One of the risks to growth is non-compliance to the oil restraint deal, the IMF said. The International Energy agency, the energy watchdog for industrialised countries, said this month that adherence to Opec cuts in June sank to 78 per cent, the lowest level since the deal started in January, as a number of members produced more than what they agreed to under the deal.

“Further declines in oil prices, for example, owing to a faster-than-expected recovery of the US shale production and/or reduced compliance with the recent agreement on oil production cuts, could reduce fiscal revenues, investment, and confidence,” the IMF said. “Spillovers from other oil exporters (particularly the GCC) could weaken trade, tourism, and asset prices, while increased issuance by other oil exporters to finance deficits could put pressure on the cost of funding.”

If this scenario of lower oil prices were to take place, it would lead to lower oil exports and fiscal revenues.

“A $10 drop would worsen fiscal and external balances by 4 and 3½ percentage points of GDP respectively, assuming no policy response,” the fund said.

Also the same scenario would lead to a slowdown in non-oil growth, the fund added.

“A permanent $10 drop in oil prices could reduce UAE GDP level by 2½ percentage points after five years, assuming revenue losses are fully offset with expenditure cuts,” it added.