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UAE Economy may Shrink for First Time in 15 Years: IMF

In its bi-annual report on the regional economic outlook released on Sunday at the Dubai International Financial Centre, the Washington-based Fund said that the decline is a consequence of a fall in crude oil prices, slowdown in the world economy and drop in domestic demand due to decreasing asset prices such as real estate and shares.

The IMF said that it expects the UAE economy to decline by 0.6 per cent this year before recovering to post positive growth rate of 1.5 per cent in 2010. The fund forecasts the UAE’s oil gross domestic product — the market value of final good produced in the sector — to decline by 5.3 per cent. However, it expects the sharp contraction in the hydrocarbon sector to be cushioned by increase in the public spending. The fund also expects the UAE’s non-oil GDP to grow at 0.8 per cent this year and 1.8 per cent next year. The country’s non-oil sector accounts for just over 60 per cent of the country’s economy.

The report further forecasted the Gulf Cooperation Council, or GCC, members to collectively grow at their slowest pace since 1999. The GCC economy is expected to grow at 1.3 per cent this year compared to 6.4 per cent in 2008.

The other major oil exporters — Saudi Arabia and Kuwait, are also expected to shrink more than the UAE. Saudi Arabia, the world’s largest oil producer is expected to decline by 0.9 per cent and Kuwait is expected to contract by 1.1 per cent this year. Both the economies are expected to rebound in 2010 with Saudi Arabia and Kuwait projected to grow by 2.9 per cent and 2.3 per cent respectively.

Qatar seems to be the only country in the region that would post double-digit growth rates boosted by infrastructure spending and gas exports. According to the IMF, in the fiscal year 2009-10, Qatar is expected to grow at over 17 per cent. The smaller GCC economies of Bahrain and Oman are expected to grow at 2.5 per cent and 3 per cent respectively in 2009 much slower than 6.1 per cent achieved by both the countries last year.

Speaking on the occasion, Dr Masood Ahmed, Director of IMF’s Middle East and Central Asia department, said that while oil exporters have been affected by drop in oil prices, the impact is “much more moderated” than most parts of the world.

“The reason why, despite the drop in oil prices, they (the GCC countries) continue to do well is because most of them are using the reserves they have accumulated during the boom years to maintain the level of public spending. Continued public spending during a slowdown not only is protecting their own domestic economy but is also having positive spillover effect on neighbouring countries,” he said. The IMF is urging countries to maintain or increase public spending to offset the lack of spending by private sector.

The IMF expects oil prices to range $52-53 this year and it estimates that the GCC countries would lose about $290 billion exports receipts due to lower oil prices compared to last year. In 2008, the GCC countries exported about $822 billion worth of goods and services, but it is expected to drop to about $532 billion in 2009.

According to Dr Ahmed, despite the record fall in export earnings, the continued efforts of the GCC countries to diversify the economy by investing in infrastructure and human development is having a positive impact on the global economy. The GCC economies are expected to increase their share of global imports to about 3.3 per cent in 2009. “Not only this had an effect on their own economy but at a time of global slowdown, the oil exporters in the region are contributing in sustaining global demand and this stabilising role of the region is something worth mentioning,” said Dr Ahmed.

There is some good news on inflation front. The fall in rents and commodity prices are expected to halve the region’s inflation from 10.7 per cent in 2008 to 5.3 per cent this year. The UAE will be the significant beneficiary, where inflation is expected to fall from an estimated 11.5 per cent last year to two per cent this year.

· aruna@khaleejtimes.com