UAE puts up tough fight against global economic storm

The UAE is putting up a tough fight against turmoil in the global economy and oil markets following the September attacks in the US, counting on its strengthening private sector and enormous overseas cash reserves. A sharp retreat in oil prices over the past few weeks is set to push down UAE's crude oil and gas sector by at least 20 % -- but bankers expect this to be offset by growth in private business and the non-oil sectors.
Although the consolidated budget, which includes federal spending and the budget of each emirate, will likely suffer from a deficit this year, it will be easily shored up through returns from investments abroad. The current account could also be upset after it recorded one of its highest surpluses last year -- at $ 9.1 bn -- but the UAE remains one of the biggest net capital exporters in the Arab world.
"There is no doubt the slide in oil prices and global economic uncertainty after the attacks in the US will affect UAE's economic and financial performance this year," a bank manager said. "But such an effect will not be damaging given its strong financial position, high domestic liquidity and the growing role of the private sector."

Bankers estimate the UAE controls nearly $ 60 bn in overseas cash reserves, including around $ 33 bn in foreign assets for local banks. The country's official reserves with the IMF are estimated at around $ 14 bn while the rest are controlled by the Central Bank. Such reserves do not include the massive foreign investments managed by Abu Dhabi Investment Authority.
Official figures showed UAE's expenditure in the consolidated budget at around Dh 350 bn ($ 95 bn) over the past five years while revenues did not exceed $ 75 bn. The cumulative deficit of around $ 20 bn was covered through returns from investments abroad rather than borrowing.
"Whether there will be a deficit in the budget or the current account this year, I don't think it is a problem considering such a strong financial position," a banker said. "Another importantfactor is that the UAE is not saddled with a heavy domestic debt as is the case in other countries in the Middle East."

Figures by the Planning Ministry showed the UAE enjoyed high domestic liquidity which enables banks to finance private business and contribute to growth. The 47 commercial banks had nearly Dh 132 bn in liquidity by end 2000.
High liquidity and sharp increase in deposits allowed banks to boost loans by more than Dh 50 bn over the past five years to around Dh 155 bn by end 2000. Nearly 76 % was channelled to the private sector. "This reflects the growing role of the private sector in the economy as it is encouraged by high public spending and incentives for investors," a banker said.
Independent estimates show the private sector accounting for over 45 % of the economy compared to 30 % ten years ago. The expanded contribution has enabled it to partially offset the impact of fluctuating oil prices.
In real terms, UAE's GDP grew 6.5 % last year while in nominal terms it leapt 15 % because of the surge in oil prices. Officials and experts expect real growth to be around 1 % this year, although nominally there will be a decline because of a projected drop of more than $ 4 a barrel in oil prices. Such a drop will push UAE's crude export earnings from a record $ 21 bn last year to nearly $ 16 bn this year, according to forecasts by the London-based Centre for Global Energy Studies.