A steep oil production cut will ally with the global downturn to sharply depress the UAE economy this year but the real GDP could still slightly increase because of growth in the non-oil sector, according to bank forecasts.
Like other Gulf oil producers, the UAE is feeling the heat of the global financial crisis in terms of a sharp drop in crude export earnings, liquidity crunch and an unprecedented haemorrhage in the financial market.
While such factors will combine with an oil production cut of more than 300,000 barrels per day to push the country's real GDP growth to its lowest level in many years, a contraction remains unlikely in 2009.
"The news flow emerging from the UAE economy points to continued weakness, but a consensus amongst analysts seems to have emerged that economic growth will be much reduced, though positive this year," the government-controlled National Bank of Kuwait (NBK) said this week.
"Forecasts by analysts for real economic growth in 2009 appear to have converged around the zero to two per cent level (including our own of one per cent), well down on estimates for the past couple of years, but by no means a disaster compared to the deep falls in output expected in other parts of the world. Indeed, much of this forecast weakness reflects a projected fall in oil output as a result of big cuts in Opec production, so the performance of the non-oil economy is implicitly assumed to remain considerably more robust."
NBK gave no figures on the UAE's expected oil production this year but according to the Saudi American Bank (Samba), average output could tumble to nearly 2.23 million bpd from 2.57 million bpd in 2008 in line with an agreement by the 12-nation Opec to trim supplies by a combined 4.2 million bpd over the past few months to halt a rapid slide in crude prices.
The cartel, which pumps just below 40 per cent of the world's oil supplies but controls 70 per cent of the global crude reserves, decided last week against a fourth output cut but left the door open for another reduction at its next meeting in May in case prices do not firm up.
In 2008, the UAE's real GDP surged by around 6.8 per cent while in nominal terms, it jumped by nearly 14 per cent as a result of a surge in crude prices to record levels and high crude production by the Gulf country.
Samba's forecasts showed the UAE's real GDP could still grow by around 0.5 per cent in 2009 before it sharply rebounds to 3.9 per cent in 2010. Its figures also showed the nominal GDP could plunge by around $57 billion (Dh209.37bn) in 2009 but would recover by nearly $17bn next year. It also expected the UAE to maintain a positive balance in its budget and current account this year despite a sharp fall in the surplus.
"On the positive side, the UAE policy authorities have spent considerable effort over the past few months attempting to stabilise the banking and financial sectors – surely a precursor to re-establishing confidence amongst the UAE's businesses and consumers," NBK said.
"Finally, the measures taken so far may have lent support to the banking sector, but they have done little to stabilise other asset markets to which banks and borrowers are heavily exposed. Until these markets stabilise, it is difficult to see banks feeling confident enough to restart lending in a significant way. Private sector demand for loans is likely to be weak for similar reasons. Accordingly, even if the acute pressures seen in financial markets ease off later this year, it seems likely that bank lending will remain subdued for some time to come."
According to the study, the measures taken by the UAE government to support the financial sector and record budgets approved by Dubai and the federal government for 2009 would help cushion the impact of the crisis. But it ruled out a recovery to the levels during the oil boom.
"As such, while the government may be doing what it can on the fiscal front (there are surely limits to how large a fiscal stimulus in any one year can be), it seems unlikely that it will be able to push overall economic growth back up to recent levels – or indeed anything close," it said.
"Overall therefore, we expect to downgrade our forecast for GDP over the next few weeks. While (thanks to the huge reserves) the economy of the UAE and other Gulf countries remain better positioned to weather the economic storm than
most others. the downturn highlights just how exposed to cyclical forces the private sector often is – no matter how impressive the scale of government support turns out to be."
A breakdown by the Emirates Industrial Bank (EIB) showed the UAE non-oil sector remained a strong performer, surging by around 8.4 per cent in 2008. It was largely outperformed by the oil sector but the reason was mainly because of an increase of nearly $30 in crude prices.
"Achieving high growth rates despite the sharp decline in oil prices towards the end of 2008 is in itself a very good development as this demonstrates the strength of the UAE economy and its ability to overcome any repercussions of the global economic crisis," EIB said in its recent economic bulletin. "This, of course, will allow the UAE to deal with any developments in 2009."
Besides strong oil prices, the UAE economic growth in 2008 was fuelled by a surge in construction projects, good banking performance in the first half, and an expected rise in gross fixed capital formation to a record Dh143bn in 2008 from Dh123.7bn in 2007, according to the Ministry of Economy.
The fiscal sector was also a good performer in 2008, with the current account surplus projected to soar to more than Dh150bn after hitting a record high of Dh135bn in 2007, Central Bank estimates showed.
Figures by the US Energy Information Administration showed the UAE earned a record $92bn (Dh337bn) from oil exports in 2008 and the income could plummet to a third of that level in 2009.
Strong economic performance over the past two years was accompanied with a surge in inflation in the UAE to around 11.1 per cent in 2007 and a record 14 per cent in 2008. But the rate is expected to plunge in 2009 as a result of the sharp fall in global prices and strengthening of the US dollar.
Gulf oil output dives by over 1.2mbpd in January
The UAE and other Gulf oil heavyweights slashed their actual crude production by more than 1.2 million barrels per day (mbpd) in January to comply with a collective Opec deal to lower output to support oil prices.
Official figures showed Saudi Arabia alone trimmed production by nearly 500,000 bpd while output by the UAE, Kuwait, Qatar and Iran was also sharply lower in January following near peak output through 2008.
From around 18.245mbpd in December, the combined production of the five Gulf producers dived to 17.042mbpd in January, showed the figures by the Riyadh-based Energy Joint Oil Data Initiative (Jodi).
Reporting its crude output to Jodi, Saudi Arabia said it pumped around 8.102mbpd in January compared with nearly 8.586mbpd in December. Kuwait said it produced 2.323mbpd in January against 2.500mbpd in December while Iran said it reduced production to around 3.586mbpd from 3.865mbpd. Qatar's output fell to 731,000 from 780,000 bpd. The UAE gave no figures on its January output but sources close to the Abu Dhabi National Oil Company (ADNOC), which controls most of the country's hydrocarbon sector, said the UAE slashed production to around 2.3mbpd in January from nearly 2.513mbpd in December.
Iraq, which controls the world's third largest oil resources after Saudi Arabia and Iran, pumped nearly 2.231 million bpd in December. It did not specify its January output but Iraq has been outside Opec's quota agreements for several years because of persistent internal conflicts.
The figures by Jodi, which groups more than 100 oil producers and consumers, showed the collective output cut by the five Gulf producers inside Opec's quota system stood at 1.203mbpd in January.
Compared with their September production, the reduction was as high as 2.883 million bpd, according to Jodi.
Opec has approved collective production cuts of 4.2mbpd since September, with the first cut of 500,000 bpd taking effect on October 1. The second reduction of 1.5mbpd was enforced on November 1 while the bigger cut of 2.2mbpd began on January 1.
Gulf producers are likely to bear the brunt of those cuts as they pump more than half Opec's crude supplies and they are the most affected by the price plunge given their heavy reliance on oil sales. Last week, Opec ministers decided to hold output but said a fourth cut remains on the cards at their next talks in May.Independent estimates expect actual oil output this year to average around 8.2mbpd by Saudi Arabia, 2.2mbpd by the UAE and Kuwait, 750,000 bpd by Qatar and nearly 3.5mbpd by Iran.
