Economic Update

Published 19 Jan 2018

An expected increase in oil prices, combined with sustained growth in the non-oil sector, should drive economic expansion in Abu Dhabi in 2018, allowing the economy to rebound from a relatively flat performance in the previous 12 months.

Abu Dhabi’s broader economy delivered a muted performance in 2017. In projections made towards the end of the year, the IMF said it expected full-year growth to reach 0.3%, down from 3.1% in 2016, on the back of reduced energy revenues and lower state spending. The modest growth forecasts fall marginally below the 0.5% average expansion that the IMF predicted for GCC countries in its latest world economic outlook, released on October 31.

However, rising oil prices and the continued expansion of the non-oil sector, which posted growth of 3.2% in 2017, are expected to provide the economy with a boost in 2018, supported by increased public investment and stronger global trade. GDP is expected to grow by 3.2%, according to the IMF, roughly in line with the levels forecast for the broader UAE.

Manufacturing posts gains in the second half of 2017

The first signs of a return to stronger growth emerged in the third quarter of 2017, with a rise in manufacturing output, according to data released in late December by Statistics Centre – Abu Dhabi (SCAD). Though down 0.3% year-on-year, the industrial production index (IPI) rose 6% from the previous quarter to reach 136.3, with the manufacture of basic metals noted as a key driver of growth.

The third-quarter result marked the second three-month period in succession that the IPI had posted gains, following a decline in the first quarter of 2017.

Low demand affects trade

However, cooling demand domestically and across the region meant that Abu Dhabi’s non-oil trade was muted for much of the year, according to SCAD.

While imports to the end of October eased 0.6% in value terms to Dh97.23bn ($26.47bn), non-oil exports fell by 23% to Dh18.8bn ($5.1bn) and re-exports dipped by 7% to Dh17.8bn ($4.8bn).   

Inflation muted, but set to rise with introduction of VAT

Weaker domestic demand helped keep inflation low throughout 2017. According to SCAD, the consumer price index (CPI) rose 1.6% in the 11 months to the end of November. Some of the biggest price increases were in housing, utilities and other fuels, which together accounted for 42% of the overall rise in the CPI. Costs in these segments to end-November collectively increased by 1.9%.

Transport costs also contributed, a result of the easing of fuel subsidies during the year. Costs rose by 3.9% to November and accounted for 34.6% of the total increase in the CPI.

Looking ahead, inflation is expected to rise at a higher rate in 2018, following the introduction of a value-added tax in the UAE. The 5% levy, which came into force on January 1, covers most goods and services, though some areas, including many educational and health services, have been given exemptions.

While the government has acknowledged the effects of the new levy on the CPI, it regards the VAT as necessary to maintain and expand public service provision and fund the economy’s diversification away from a reliance on hydrocarbons.

Shares in ADNOC Distribution put up for sale

In line with the drive to diversify and reinforce the fiscal base, the government began the process in 2017 of opening up some of its key state enterprises to public ownership, announcing an initial public offering (IPO) of ADNOC Distribution, the fuel distribution arm of the Abu Dhabi National Oil Company (ADNOC) in November.

The initial plan was to offer 20% of ADNOC Distribution shares for sale, though this was scaled back to 10% in early December.

Shares in the unit began trading on December 13, after subscriptions for the IPO closed on December 5. Interest was high, with the sale oversubscribed 22-fold and raising $851m.

In a statement issued on the first day of trading, ADNOC said the IPO had raised the market value of its distribution arm to $8.5bn, making it the fourth-largest firm on the Abu Dhabi exchange in terms of market capitalisation.

The offering was also the first IPO staged on the exchange since 2012, and the only such listing in the UAE in 2017. Analysts are waiting to see whether the sale encourages other listings and and boosts activity in 2018.

Landmark merger takes place

In another move designed to maximise returns on state holdings, the government took steps at the beginning of 2017 to consolidate some of Abu Dhabi’s business activities through the merger of two of its most significant investment companies: Mubadala Development Company and International Petroleum Investment Company.

The resulting combined entity – Mubadala Investment Company – has an estimated value of $125bn. As well as improving economies of scale, the company’s increased size will likely improve its ability to raise capital on international markets.