Published in Gulf States News, 18 June 2015 There’s no sense of panic in the UAE about the current oil price, but there is a growing feeling that the emirates need to prepare for a future in which the oil price remains low for a long time.
The UAE is thought to need a price of between $73/bbl and $78/bbl to balance its budget this year, but those prices have not been seen since November. In recent weeks, Brent crude has been selling for close to $60/bbl, and few market-watchers expect a sharp rise anytime soon.
The authorities in Abu Dhabi and Dubai are, in different ways, responding to the challenge, bringing in outside advisers and thinking about how and where they should make cuts.
The UAE’s Ministry of Interior has appointed recruitment firm Korn Ferry to find a ‘strategic adviser for economic affairs’, to be based in Abu Dhabi. According to job specifications seen by GSN, the new hire will advise Sheikh Saif Bin Zayed Al- Nahyan, deputy prime minister and minister of interior (and half-brother to the UAE’s de facto ruler, Mohammed Bin Zayed Al-Nahyan) on issues related to the UAE’s economic development, growth and security, with the decline in oil prices cited as a particular example.
Abu Dhabi has built up vast savings during the recent oil boom and, if it needs to, can easily draw down some of these to cover its outgoings while oil prices are low. Nonetheless, the search for fresh economic advice will reinforce its reputation for taking a relatively conservative fiscal approach.
Despite its more diversified economy, the risks posed by low oil prices are just as apparent in Dubai. While the emirate has built up a strong presence in areas such as transport, logistics, finance and tourism, much of its activity relies indirectly on the wider region’s revenues from hydrocarbons – a fact which is forcing a rethink of some elements of the emirate’s ever-ambitious building programme.
The Dubai government is now taking advice from Abu Dhabi and independent consultants on what it should do, and the expectation is that cuts will be made. “Dubai is looking at the purse strings to see how it can tighten them,” said one executive with knowledge of the government’s thinking. “The low oil price has rattled them. People are really concerned. Some plans are being re-examined. They’re asking themselves, do we really need to do this or that?”
Just what form any purse-tightening might take remains to be seen. Large infrastructure investments, such as the $32bn expansion of Al Maktoum International Airport, are likely to go ahead, as they are seen as fundamental to Dubai’s future. However, work on some real estate projects or the plethora of theme parks might be scaled back, slowed down or abandoned. Any such moves are likely to be done carefully, however, as the government is keen to maintain public confidence and give the impression of ‘business as usual’, not least because memories of the 2008 crash are still relatively fresh.
While the authorities are at least beginning to look seriously at these issues, there are mixed signals about the attitude of the private sector to low oil prices. Companies appear to still be expanding at a healthy pace, although the rate of growth is slowing. The HSBC Purchasing Managers Index for the UAE produced by research firm Markit edged down 0.4 points to 56.4 points in May, with anything over 50 points indicating growth. However, the rise in new orders was the slowest since August 2013.
A similar survey of the Dubai economy carried out by Markit for Emirates NBD Bank showed that the increase in new business volumes in the non-oil private sector in April was the weakest in more than three years, although the figure improved slightly in May. The pace of staff hiring has also been slower in 2015 than in recent years.
Governments’ efforts to reconsider their spending plans will be welcomed in Washington, where the International Monetary Fund (IMF) has for some time been urging Gulf governments to rein in their expenditure in light of the fall in oil prices. An IMF delegation visited the UAE in late May and early June as part of its annual review of the country’s economy. In a statement issued after the visit, delegation head Zeine Zeidane again took the opportunity to call for spending cuts, although he said they should be gradual. “The macroeconomic policy mix should focus on fiscal consolidation,” he said. “Fiscal consolidation should be gradual and designed in a way to minimise its growth impact.” That looks to be pretty much in line with what the UAE authorities are planning.