Abu Dhabi revives spending

Plans to spend $90bn over the next five years is a clear sign that the emirate’s short-lived austerity is over. But it will not be enough to help Abu Dhabi meet its longer-term economic targets. Published in MEED, 21 February 2013

The spending plans announced by Abu Dhabi’s Executive Council in mid-January were a typically bold move for an oil-rich Gulf government. The emirate said it intends spend AED330bn ($90bn) over the next five years to boost the economy.

Some of that money will be used to create 5,000 new jobs for locals this year and plenty more seems destined for housing, healthcare and other social projects. Other details of the investment plans have yet to be released, but Nasser Ahmed al-Sowaidi, chairman of the Abu Dhabi Department of Economic Development, said that it would “generate maximum benefits and ensure long-term sustainability of economic development”.

Economic recovery under way

The spending pledge is the latest sign that Abu Dhabi’s economy is returning to health after the downturn in 2009, when it shrank by almost 5 per cent. Since then, nominal gross domestic product (GDP) has climbed from $145.8bn to an estimated $244.6bn in 2012, according to US ratings agency Standard & Poor’s (S&P), helped along by high oil prices among other things.

There have been other positive indicators in the early months of this year too, including the long-awaited award on 8 January by the Tourism Development & Investment Company of the AED2.4bn main construction contract for the Louvre Abu Dhabi museum to a joint venture of the local Arabtec, Spain’s Constructora San Jose and Oger Abu Dhabi.

The merger of the emirate’s two largest property developers, Aldar Properties and Sorouh Real Estate, announced in January and due to be completed by June, should help to put the local construction sector back on a firmer footing.

This activity suggests the spending review that the government conducted in late 2011 and which lead to a slowdown in investment in public sector projects in 2012, may have been consigned to history. However, it does not mean that economic growth will suddenly accelerate. There are still reasons to be cautious.

“The Executive Council’s spending plan is a fairly clear statement of intent that the government is now ready to re-accelerate some of its capital spending projects,” says Simon Williams, chief economist at the UK’s HSBC Middle East in Dubai. “There was a very prudent rethinking of the capital spending. My sense is that the government now feels more ready, more confident to begin to accelerate capital spending.

“Government spending is the primary driver of growth in Abu Dhabi and it’s likely to stay that way for some time. I expect to see some acceleration in overall growth in 2013. It should be a better year than 2012, but I still think it is going to lag behind the kind of growth rates we saw in the pre-crisis period.”

The renewed commitment to investment over the coming years will be welcomed by those looking for reassurance that the government is willing to support the economy.

Among the other major projects moving ahead are the $1.6bn Strategic Tunnel Enhancement Programme, involving a 41-kilometre tunnel under Abu Dhabi city to carry the capital’s sewage, and the Midfield Terminal building at Abu Dhabi International airport, which was awarded to Arabtec, Turkey’s TAV and Athens-based Consolidated Contractors Company (CCC) in 2012.

Long-term targets

Yet all this work may not help the emirate meet its own longer term targets. The Executive Council said the new capital spending plans were drawn up in line with the objectives of Abu Dhabi Vision 2030. But until further details are announced, it is not clear how the revival in spending will promote diversification away from oil revenues or fundamentally change the relative positions of the public and private sectors in the economy.

Oil accounts for 59 per cent of the economy, according to S&P, which makes it vulnerable to swings in global prices. The government already looks in danger of missing some of the key targets set out in the development programme, which was first announced in 2008.

In its Vision 2030 document, the government set a GDP growth target of 7 per cent a year through to 2015, followed by 6 per cent for the following 15 years. According to the plan, growth would be faster in the non-oil economy, ranging from 9.5 per cent in the early years of the programme to 7.5 per cent towards the end. It also set a target of reducing unemployment among locals to 5 per cent. The 5,000 public sector jobs being created by the latest spending spree will help with that last point, but other targets are likely to be missed in the coming years.

Missed targets

The Abu Dhabi Economic Outlook Report 2012-16, released by the emirate’s Department of Economic Development in September last year, estimated that real GDP growth was around 3.9 per cent in 2012 and would rise to an average of 5.7 per cent during the period from 2013 to 2016. Non-oil growth was about 5.5 per cent in 2012, averaging 6.5 per cent during the following four years to 2016. All these figures are clearly well below the Vision 2030 targets.

Without the current high oil prices, overall GDP growth would be lower still. The lack of data provided by the authorities makes it difficult to get an accurate picture of economic developments and estimates vary as a result. But Dima Jardaneh, primary credit analyst at S&P, reckons that real GDP growth for 2012 was around 4.5 per cent, based on a strong performance in the oil sector of 6.8 per cent, but just 4 per cent in the non-oil sector. She expects the overall figure to fall to an average of 3.3 per cent from 2013 to 2016.

“The Vision 2030 targets are very ambitious targets,” she says. “I think they might have to rethink those targets at some point, given what has happened in the real estate sector. The latest spending plans are an expansionary fiscal initiative. It is helpful to the economy, but their impact depends on the type and productivity of spending. More housing and social spending may have less of an investment multiplier effect.”

Other economists also cast doubt on how achievable the long-term targets are, notwithstanding the Executive Council’s largesse. But even if it does not hit its goals, Abu Dhabi’s economy remains in a very strong position.

The fiscal surplus for 2012 was around 15.4 per cent of GDP, according to Jardaneh, based on an oil export price of $112 a barrel. She expects it to fall slightly to 14 per cent of GDP this year, assuming oil prices average $110 a barrel through the course of the year, and further still in the years to follow. But there is no sign of a fiscal deficit emerging in the near term at least. S&P estimates the government’s net asset position to be 205 per cent of GDP for this year.

Much of the emirate’s assets are held by the Abu Dhabi Investment Authority (ADIA). That body does not publish details about its holdings, but they are estimated by Fitch Ratings to be around $300bn, and the US ratings agency says the emirate has “exceptional fiscal flexibility”. Others think Abu Dhabi has far more tucked away in its sovereign wealth fund (SWF). The US’ SWF Institute puts the figure at $627bn, with a further $65.3bn in the International Petroleum Investment Company and $53.1bn in Mubadala Development Company.

Abu Dhabi’s strength has not just been down to its oil wealth. The emirate has taken a more conservative approach to spending compared with Dubai and observers expect that pattern to continue in the future.

“The recent expenditure announcement compares well to historical expenditure levels in this area,” says Giyas Gokkent, group chief economist at the National Bank of Abu Dhabi. “But there is also a desire to exercise fiscal restraint. Such expenditures are at historically high levels, but growth of these is planned to be slower than in past years.”

There are also some hopes that the ongoing recovery in nearby Dubai could feed into the Abu Dhabi economy, providing an ancillary source of growth.

“You’ve got to consider how the performance in Dubai is going to affect the other emirates as well,” says one local executive. “You can only go so long with Dubai doing well before it has a knock-on impact on Abu Dhabi or the northern emirates. We’ve been through 12 months or more of improving conditions in Dubai and we’re going to see a continuation of that in 2013.”

Knock-on effect

However, others are not so sure that there will be much of a positive knock-on effect. According to HSBC’s Williams, while Dubai can often gain from strong economic activity in Abu Dhabi by offering it the services that it excels in, there is less that Abu Dhabi can sell back to Dubai when the positions are reversed. Instead, Abu Dhabi has to rely on its own, admittedly plentiful, resources.

“Growth in Abu Dhabi tends to offer additional demand for Dubai’s service sector; the gains in the opposite direction tend to be much more limited,” says Williams. A combination of oil and government spending is likely to remain the key factor in Abu Dhabi’s economic prospects for many years to come, he adds.

“There is an ambition to develop the services sector in Abu Dhabi and the emirate’s energy and capital-intensive industries have substance,” says Williams. “But the key strengths of Abu Dhabi are likely to remain hydrocarbons wealth and the recycling of that into the domestic economy. That will set the rhythm for the economy.”