Finance Minister of the Year Middle East and North Africa 2012

UAE’s financial situation has improved as the finance ministry cut expenditure marginally and the country benefited from strong oil prices. But a major challenge for the country remains cutting its dependence on oil

The combination of the arab spring uprisings across the Middle East and North Africa (MENA) combined with the spike in the oil price prompted finance ministers in many MENA countries to embark on a spending spree and rack up fiscal deficits.

One exception was Obaid Humaid Al Tayer, the finance minister of the United Arab Emirates. His decision to cut expenditure, albeit marginally, last year, combined with the rise in oil prices, enabled the UAE to deliver an improvement in the consolidated overall balance from a deficit of 2.1% of GDP in 2010 to an estimated surplus of 2.9% of GDP in 2011.

The world’s third-largest oil exporter booked a consolidated fiscal surplus of 38.6 billion dirhams ($10.5 billion) compared with a deficit of AED 23 billion in 2010. These figures consolidate the accounts of the federal government with those of Abu Dhabi and Dubai.

“The fiscal stimulus they did was smaller in comparison with other Gulf states. It was a bit more restrained,” Said Hirsh, MENA economist at Capital Economics, says. “In fact, they have been cutting back on spending money.”

Following 2010’s fiscal expansion, Al Tayer plans to continue consolidating its fiscal accounts in 2012. The federal and emirate budgets imply a modest consolidation of the fiscal stance by 0.5% of non-hydrocarbon GDP.

However this year will see the emirates post a small federal deficit of AED400 million against a draft 2012 federal budget of AED41.8 billion.

Analysts have also credited the finance ministry for embarking on long-term reforms of the financial sector. Khalid Howladar, VP-senior credit officer for financial institutions and sukuk finance at Moody’s, the credit ratings agency, says the UAE has passed a lot of “new and needed regulations... all of which have improved and advanced the regulatory environment in key areas such as consumer lending, concentration risk, and most recently liquidity.”

The IMF has hailed the fiscal plans as “prudent”, as they increase the scope for fiscal expansion in case downside risks to the economy materialize, including the risk that further funds may be needed.

One major challenge that the finance minister faces is the need to reduce the dependence of fiscal revenues on the hydrocarbon sector. According to the IMF, the non-hydrocarbon primary deficit rose to nearly 42% of non-hydrocarbon GDP. Moreover, the oil price at which the budget would be in balance has increased “markedly” in recent years, to $84 a barrel this year from just $23 in 2008, exposing the UAE to the risk of falling oil prices, the fund warns.

For now, the UAE has been benefiting from high oil prices, which helped it to achieve an estimated 4.9% GDP growth in 2011. Its proven reserves are 98 billion barrels, the seventh-largest in the world, or 6% of total global reserves, according to research by QNB bank.

In its competitiveness report for 2012, the World Economic Forum praised the UAE’s strong government budget balance (7th among 144 countries surveyed for the report) and the improving public trust in politicians and high government efficiency. The UE gained three places in the Global Competitiveness Index for 2012–13, to the 24th position. “The improvement reflects a better institutional framework as well as greater macroeconomic stability,” according to the World Economic Forum.

Beleaguered Dubai, which sent shockwaves through financial markets in 2009 when one of its main state holdings, Dubai World, asked for a delay on the repayment of debt, is on the mend with help from Abu Dhabi.

“Growth recovers and Dubai Inc. restructuring progresses steadily. Direct Abu Dhabi transfers have supported fiscal balances, providing a sovereign backstop,” BofA Merrill Lynch analyst Jean-Michel Saliba wrote in a recent report, adding: “We expect the Dubai government to return to market in the near future.”

Saliba notes that two out of the three engines of Dubai’s economy, external trade and the banking sector, have remained solid over the past year, “while the real estate sector is now showing signs of thawing”.

For the UAE as a whole, QNB Group analysts forecast a real GDP growth of 2.6% for this year and of 2.8% in 2013, driven by the services and industry sectors, as trade and government services are seen growing at a swift pace.

The analysts say that the UAE’s investment in alternative energy sources will limit the use of oil as a power source, boosting exports and therefore increasing budget revenues further, and will reduce the domestic use of natural gas. In 2009, a South-Korean-led consortium received a $20 billion contract to build four nuclear power plants, with the first expected to be operational in five years. The UAE’s first solar power plant is due to be completed at the end of this year and a second one next year; a wind farm project was announced last year in April but little progress has been made.