Abu Dhabi is the largest of the seven emirates that comprise the UAE, in terms of both its land mass and economy, and home to the majority of the country’s energy production and reserves. According to Statistics Centre - Abu Dhabi (SCAD), the emirate’s economy expanded at a rate of 31.7% in 2005 and 32.3% in 2011 in nominal terms. Although lower external demand and a sharp drop in oil prices in mid-2014 weighed on activity, Abu Dhabi’s economy remained resilient, growing by 9.5% in 2017.
Given the current environment, in which oil prices remain below the $100 mark seen at the beginning of the decade, the emirate has embarked on a strategy focused on economic diversification and more efficient government spending. The drive features an examination of public spending and fiscal management; phased reductions and eliminations of subsidies for energy, electricity and water; and the gradual consolidation of duplicative commercial entities controlled by government bodies. Efforts at the emirate and national level to increase public revenue are proving to be effective. In January 2018 the Khaleej Times reported that the budget deficit for the UAE was forecast to shrink from 2.7% of GDP in 2017 to 1.5% in 2018, before balancing in 2019.
Consolidation & Diversification
As part of its drive to consolidate government spending and reshape the economy, the emirate has encouraged mergers among some of the biggest names in its financial sector. “The economy has been adjusting to lower oil prices, and fiscal consolidation has been felt,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, told OBG. “This has included a pull-back in government expenditure.” In March 2018 Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, mandated that the Abu Dhabi Investment Council (ADIC) merge with the emirate’s other primary investment vehicle, Mubadala Investment Company, a move that boosted Mubadala’s total assets to over $225bn. This followed a merger the previous year of National Bank of Abu Dhabi and First Gulf Bank to form First Abu Dhabi Bank, which became the largest lender by assets in the UAE and second largest in the GCC, holding around $190.3bn in assets by the end of 2017. In October 2018 there were some 50 banks operating in the country, according to the Central Bank of the UAE (CBUAE), for a population of approximately 9.4m. Consolidation will help to reshape the economy and enable state-owned enterprises to more effectively navigate lower oil prices.
The current policy to increase financial efficiency overlaps with the emirate’s longterm economic plans published in 2008. Abu Dhabi Economic Vision 2030 aims to ensure future prosperity by reducing the emirate’s reliance on hydrocarbons through the development of a sustainable, knowledge-based economy fuelled by private sector activity. The strategy targets greater investment in non-oil sectors and foreign countries through vehicles such as sovereign wealth funds. Specifically, Abu Dhabi is targeting areas such as research and development, technologically advanced manufacturing and other high-value-added areas that are not necessarily labour intensive. “The old model whereby you advance from agriculture to labour-intensive manufacturing to high value-added manufacturing is no longer viable,” Mohammad Helal Al Muhairi, director-general of the Abu Dhabi Chamber of Commerce and Industry, told OBG. “Now you have to leapfrog to high-tech activity.”
According to SCAD, 2017 saw GDP at constant 2007 prices contract slightly by 0.5% to Dh785.6m ($213.8m), having expanded by 4.4% in 2014, 4.9% in 2015 and 2.6% in 2016. However, the emirate’s GDP at current prices expanded by 9.5% in 2017, driven by the recovery in oil prices that year. Though Abu Dhabi is working to ensure its resilience to volatility in energy markets and prepare for a post-carbon economy, the volume of its oil and gas output means that oil production remains a central component of its economic success.
In 2017 the mining and quarrying sector, which includes crude oil and natural gas, accounted for 35.9% of GDP at current prices, up from 31.7% in 2016. Oil & Gas Journal estimates from January 2017 place the UAE seventh largest in terms of proved reserves of oil in the world at 97.8bn barrels. According to Organisation of the Petroleum Exporting Countries (OPEC) reports, the country’s total oil production averaged 2.89m barrels per day (bpd) between early 2012 and late 2018. Abu Dhabi holds some 90% of the energy reserves in the country, the production of which is overseen by the state-owned Abu Dhabi National Oil Company (ADNOC).
Established in 1971, ADNOC has grown into a vertically integrated, state-owned enterprise, which oversees all aspects of energy production, refining and distribution. While ADNOC is not the UAE’s only producer of oil, it is the dominant producer; the difference between UAE production and ADNOC production is around 800,000 bpd.
According to the company’s annual report for 2017, while its total volume decreased by 3.4% on the previous year to stand at 10bn litres, revenue rose by 11.8% to Dh19.8bn ($5.4bn). Excluding the impact of the Emarat Dubai transaction, whereby ADNOC supplied fuel to 59 service stations in Dubai in the first half of 2016, volume was up 2.2%.
Impact of Fluctuations
At current prices, some sectors of the economy showed substantial fluctuations as the result of changes in energy revenue. For instance, while mining and quarrying fell from a 50.6% share of the economy in 2014 to 31.7% in 2016, and then rebounded to 35.9% in 2017, the third-largest sector, financial services and insurance, saw its contribution deviate from 6.4% to 9.6%, before falling to 9%. However, at constant prices, the mining and quarrying sector maintained a contribution to GDP consistently around 49% between 2014 and 2017, while financial services and insurance showed more modest but steady growth from 6.6% to 7.4%, a significant non-oil sector increase. In comparison, construction, the second-largest sector overall, declined marginally from around an 11% share in 2014 to 10.1% in 2017.
Capital expenditure as a percentage of public spending has also been trending downwards, from 23.8% growth in 2014 to 19.2% in 2015, 17.5% in 2016 and 14.2% in 2017, according to SCAD. For most sectors of the economy, GDP growth rates matched the fluctuation in oil revenue over the years. This was most notable in the electricity, gas, water supply and waste management sector, which expanded by 10.1% at constant prices in 2014 and 23.2% in 2015, before dropping sharply to about 2.3% a year later and rising to 10.4% in 2017. This trajectory was due in part to the federal government phasing out subsidies for utilities in 2017, which resulted in a higher level of expenditure in the sector.
The IMF’s 2018 Article IV Consultation noted that the UAE’s GDP rose by 3% at constant prices in 2016 to approximately $357bn and by 0.8% in 2017 to around $383bn. The organisation predicted this trend would continue at a pace of around 2.9% and 3.7% in 2018 and 2019, respectively. The UAE has the most diversified economy among the six countries of the GCC, thanks to various efforts such as Abu Dhabi’s downstream activities, and Dubai’s emergence as a global tourism and shopping destination. Hydrocarbons accounted for 25% of the country’s GDP in 2014, compared to an estimated 15% in 2017. In its “Regional Economic Outlook” update published in November 2018, the IMF predicted GDP growth for the GCC would recover to 2.4% in 2018 and 3% in 2019, following a 0.4% contraction in 2017.
Due to the UAE’s decentralised structure, some federal entities play slightly different roles in comparison to peer institutions in other countries. The CBUAE, as a lender of the last resort, is ready to help banks facing financial difficulties; however, in the event of a solvency crisis, bailouts would most likely come from the banking institutions of individual emirates. Financial services providers in the UAE are regulated at the federal level and can operate across the country. The governor of the central bank is Mubarak Rashed Al Mansoori, who oversees the institution in a dual-leadership structure shared with Khalifa Mohammed Al Kindi, chairman of the CBUAE. The former oversees day-to-day operations and represents the institution at international events, while the latter is responsible for chairing board meetings and has ultimate policy authority. Monetary policy is generally anchored by the UAE dirham’s peg to the US dollar and follows the interest rate moves of the US Federal Reserve. In Abu Dhabi, in addition to its line ministries, the government has established a series of capital-management arms tasked with investing its wealth according to a range of strategies. Largest among the investment arms is the Abu Dhabi Investment Authority, which had $683bn in assets as of 2018, according to the Sovereign Wealth Fund Institute (SWFI), making it the third-largest fund of its kind worldwide, behind Norway’s Government Pension Fund Global, which had $1trn in assets, and China Investment Corporation with $900bn.
Mubadala Development Company, which was established in 2002 and merged with the International Petroleum Investment Company (IPIC) in 2017, is active in 13 sectors in 30 countries. Established in 2007 and tasked with investing in the Abu Dhabi government’s surplus financial resources according to a global and diversified approach, ADIC had assets worth $123bn, making it the third-largest fund in the emirate. The March-2018 merger of Mubadala and ADIC created the world’s 14th-largest sovereign wealth fund in terms of assets (see analysis).
The year 2017 saw the passage of a landmark law governing the management of public financial resources. The legislation, Law No. 1 of 2017, mandates an institutional framework for public fiscal management marked by transparency and accountability, and reinforces the need for efficient spending. It also categorises the work of Abu Dhabi’s Department of Finance under five strategic objectives: increased revenue, efficient public spending, maintaining reasonable amounts of public debt, boosting returns from public investments while reducing financial risks, and boosting liquidity and financial reserves.
In March 2018 a new law was issued at the federal level to further control and standardise public spending. The law forbids federal ministries or autonomous state institutions from requesting approvals for additional spending in 2018 beyond what was approved in the budget, unless they can offer up a revenue source to provide the funding.
While the emirate has been working to improve the quality of spending, the lower oil price environment experienced since mid-2014 has highlighted the importance of this effort, given that Abu Dhabi is the largest contributor of funds to the federal government. According to data from SCAD, Abu Dhabi contributed 38.4% of its public expenditure to the federal government in 2017, up from 35.4% in 2016. The uptick followed a shift in the UAE’s budget balance, from a surplus of 10.4% of GDP in 2013, to a deficit of 4.3% in 2016, the latest year for which official statistics are available. The budget shortfall was plugged through several measures, including investment income acquired from sovereign wealth funds, bank borrowing and debt sales.
In October 2017 Abu Dhabi sold $10bn in eurobonds, split into three tranches. The biggest of the three comprised $4bn in notes with a 10-year maturity and priced at 85 basis points above the rate for US Treasury bills at the time. The other two tranches were worth $3bn each, with one containing five-year bonds priced at 65 basis points over US Treasury bills, and the other 30-year bonds at 130 basis points over the US benchmark. The sale attracted $30bn in bids and was Abu Dhabi’s second bond sale in two years, with the emirate having returned to the bond market in April 2016 after a seven-year absence to sell around $5bn worth of bonds. Abu Dhabi’s increased debt market activity helped the GCC to issue a total of $84bn in bonds in 2017, its greatest annual bond issuance on record.
Credit ratings agencies Standard & Poor’s (S&P) and Moody’s have both assigned Abu Dhabi an investment-grade rating. In early 2018 S&P rated the emirate’s outlook as stable and warned that it could turn into a negative rating if fiscal deficits or contingent liabilities pushed liquid assets below 100% of GDP. A positive rating action could be triggered by an increase in data transparency, such as making information about fiscal assets more publicly available, and significant progress with ongoing institutional reforms. If its capital markets are developed further, that would also position the emirate for a ratings upgrade, according to S&P. In May 2017 Moody’s revised its outlook for the emirate from negative to stable, affirming its investment grade of “Aa2”. “The principle reason cited for this high investment-grade rating is the assumption that the obligations of the UAE federal government will be fully supported by Abu Dhabi,” according to a 2017 bond prospectus for First Abu Dhabi Bank, the emirate’s largest lender.
However, Abu Dhabi’s return to the debt market is not just about balancing the budget. Borrowing has also helped to establish a yield curve – a plotted graph of interest rates for government bonds of varying maturities which helps create a bigger market for other bond sales. Since corporate and sub-sovereign debt issues are generally priced at a premium to government bonds of the same maturity, yield curves help this price-discovery process by creating points of comparison, increasing investor confidence in debt securities of non-government entities. In this case, Abu Dhabi’s two international debt issuances will help its government-related entities (GREs) tap debt capital markets and make them less dependent on the emirate itself. In October 2018 Sheikh Khalifa issued the Federal Decree Law No. 9 of 2018 to allow the government to issue sovereign bonds (see Capital Markets chapter); however, as of early November 2018 there have been no debt sales at the federal level, and UAE federal entities had yet to issue bonds or sukuk (Islamic bonds).
Official data on Abu Dhabi’s revenue and expenditure in 2017 was not yet available as of early November 2018; however, final figures may show a fiscal surplus given that the 2017 budget was based on an estimated oil price of $50 per barrel and a rally saw the average price of Brent crude rise to $54.30. The budget was created in advance of production cuts mandated by OPEC, which were introduced in the first half of the year, but according to economic research from Bank of America Merrill Lynch, an average price of $50 per barrel of oil could have yielded a surplus. The 2017 budget statement put spending at Dh270bn ($37.5bn), approximately 6% less than in 2016, against projected revenue of Dh285bn ($77.6bn). This would leave a surplus of Dh15bn ($4.1bn), flipping the fiscal standing from previous years: Abu Dhabi recorded deficits of Dh32bn ($8.7bn), or 4.1% of GDP, in 2015; and Dh29.1bn ($7.9bn), or 4% of GDP, in 2016.
At the federal level in late 2017, the UAE approved a Dh51.4bn ($14bn) budget for 2018, which is part of the 2018-21 budget totalling Dh201.1bn ($54.7bn). Of the 2018 budget, 43.5% of spending was allocated to funding social services, which reflects the division of responsibilities between emirates and the federal government. Each emirate oversees its own economic development, natural resource extraction, infrastructure and other such priorities, while the federal government mainly provides security, social programmes and some utilities.
At the end of September in 2018 the federal government signed off on a Dh60.3bn ($16.4bn), zero-deficit budget for 2019, up 17% on the previous year’s budget and the largest in the country’s history. It is part of a Dh180bn ($49bn) budget that extends over the 2019-21 period.
Temporary measures may have worked to eliminate the deficits, but for the long term, the emirate’s plan to stay in the black is a mix dependent on spending measures and new revenue streams, some of which have already been wholly implemented and others that are part of a phased process. On the spending side, these include less money for GREs, which are expected to source more funding on their own through debt sales or other avenues (see Capital Markets chapter). The government has also gradually phased out subsidies on fuel, electricity and water, beginning the process in 2015.
While the UAE decided to retain regulatory control of prices for consumer fuel, they are allowed to rise in line with global market prices. Meanwhile, power and water costs are handled individually by emirates, and in 2015 Abu Dhabi moved to partially remove subsidies on electricity and water, resulting in increased rates for expatriates. For fuels, this led to a drop of around 4.1% on transport costs in 2016, followed by a jump of 5.4% in 2017 as crude prices rebounded, according to the CBUAE’s 2017 annual report. These markets remain regulated, and though some elements of subsidy persist, they could be cut in the near future. “The UAE is considering removing all forms of gas and electricity subsidies in the future,” Suhail Mohamed Faraj Al Mazroui, the UAE minister of energy and industry, said during a panel discussion at the Abu Dhabi Sustainability Week conference in the capital at a panel discussion in January 2018.
Prices for these utilities remain lower than in many parts of the world, but Abu Dhabi as an emirate and the UAE as a country have made significant progress in cutting subsidy expenditure. Between 2013 and 2015 direct energy subsidies fell by about 30% to $12.6bn, which is slightly less than 3% of GDP, according to a report published in January 2016 by US-based think tank Brookings Institution. “What is noteworthy is that reforms were initiated before they became urgent,” the report concluded.
Subsidies are grouped together in the national accounts with transfers to GREs, and this combined figure is a useful statistical indication of economic activity, as well as the progress on spending reforms in the emirate and the UAE.
“There have been signs that suggest GREs will become more self-reliant in terms of funding.” Though GREs may be asked to increase their financial independence in the future, in the short term, federal expenditure on subsidies has been expanding. Spending in this category ramped up in the first quarter of 2018 by approximately 15.9% yearon-year (y-o-y), according to data from the latest quarterly report from the CBUAE.
Abu Dhabi’s revenue declined by 38.4% in 2015 and 29.7% in 2016, before rising by 44.9% in 2017 as a result of higher petroleum royalties and tax revenue. As a share of total government revenue, petroleum royalties and tax revenue rose from 71.7% in 2016 to around 79.3% in 2017. Meanwhile, department collections revenue dropped from 18.7% to 11.5%, and capital revenue was down from 9.6% to 9.2%. According to the latest annual report to have been made available by the CBUAE, revenue trends at the federal level fell by some 26% in 2015 before jumping by approximately 42% in 2016.
In the first three quarters of 2017 the figure expanded by around 38% y-o-y. While the UAE is pursuing economic diversification to lessen its reliance on oil revenue, it has already managed to diversify government revenue streams to some extent. In 2017 the country – along with others in the region – introduced two new taxes, namely, the GCC Unified Selective Excise Tax and the Unified Value-Added Tax (VAT). The excise tax came into effect on October 1, 2017 and aims to reduce the consumption of unhealthy products, with a 50% tax on most carbonated drinks, and a 100% tax on energy drinks and tobacco.
Implementation of VAT, which took effect in the UAE on January 1, 2018, is more complex because it applies to most goods and services, and involves a greater degree of administrative complexity, such as refunds for businesses that meet certain criteria. The Federal Tax Authority, based in Abu Dhabi and established in 2016, is the implementing agency and maintains a list of exemptions on its website. For example, in the financial services sector, the fee for sending remittances is subject to the 5% tax, but currency exchange services are exempt. In the insurance sector, one complication is the challenge of taxing policies in which the coverage period includes portions of 2017 and 2018. In those cases, a prorated amount will apply based on the value of coverage in 2018; however, insurers did not collect VAT for that period in 2017, and therefore could have a difficult time collecting this money retroactively. Some may bear the cost burden themselves.
While the transition period for VAT presents short-term challenges, more long-term benefits are expected beyond additional revenue for the country and its emirates. One area upon which the tax is anticipated to have a positive impact is small and medium-sized enterprises (SMEs). For businesses, complying with the new legislation means collecting and remitting tax revenue and then applying for relevant refunds. This involves registering with the tax authority and maintaining more detailed accounts of their businesses. This could boost future access to finance by providing lenders with a clearer picture of company revenue and operations, providing additional incentive to lend to SMEs.
Tax legislation has long been on the cards for the UAE and is part of the ongoing debate at the GCC level. The introduction of taxes to the region is challenging because the GCC has long been seen as a no- or low-tax jurisdiction thanks to its wealth derived from oil. While it remains true that there are no personal income taxes in Abu Dhabi, the UAE or the GCC, tax has counted as a revenue source for years, in particular from foreign investors.
The new taxes therefore mark an evolution in policy, rather than a complete remodelling of it. According to the findings of the IMF’s 2017 Article IV Consultation for the UAE, tax revenue collected from VAT is projected to yield the equivalent of approximately 1.5% of GDP over the medium term.
Over the short term, 2018 and 2019 are set to represent a transition period for Abu Dhabi’s economy. Public spending is on the rise as the government emerges from its adjustment phase, but an eye still needs to be kept on hydrocarbons prices. After reaching over $85 per barrel in early October 2018, oil prices at the close of the year were lower than in January 2018. In late 2017 the Abu Dhabi Department of Economic Development forecast GDP would grow by 3.2% in 2018 and the non-oil economy would expand by 3.8%.
The introduction of VAT at the beginning of 2018 could make it more difficult to compare year-to-year figures and may have already influenced commercial spending patterns. The Emirates NBD purchasing managers’ index, which measures activity in manufacturing and services, rose to a 35-month high in December 2017 before moderating in early 2018. The late-2017 jump was attributed to businesses buying extra stock, and raw and intermediate materials and supplies ahead of the introduction of VAT, which may also explain the lower activity on the index in the months following its implementation.
In addition, VAT was expected to boost the country’s inflation rate to between 2.7% and 3.7% in 2018, the Gulf News reported Malik as saying. The IMF forecast a rate of about 3% in 2018, while S&P predicted 2.5%. These are expected to be year-one adjustments, and the headline rate is estimated to drop to 2.5% in 2019, according to the IMF. For businesses, there may be higher costs, implementation challenges and subdued earnings growth, which will be compared to the pre-tax environment of 2017.
Over the medium term, the outlook remains tied to the emirate and the country’s continued progress on diversification initiatives. The UAE already has the most diversified economy in the region, which is in part thanks to the varied, natural endowments of its emirates. While Abu Dhabi accounts for almost all of the country’s oil production, Dubai has emerged as a major logistics, tourism and financial services hub. Other emirates have also carved out their own identities, such as the manufacturing clusters and free zones of Ras Al Khaimah and industrially strong Sharjah.
The hosting of Expo 2020 is expected to give Abu Dhabi’s economy a medium-term boost, as it will take place at a site roughly equidistant between the central business district of Dubai and Abu Dhabi’s main commerce area. The international event is expected to create construction and lending opportunities, as well as new assets that require insuring. Over the long term, many of the facilities of Expo 2020 will be converted into research and development facilities, Al Muhairi told OBG. The next challenge, therefore, is to build human capital. “There is a clear mismatch between labour demand and supply,” Al Muhairi explained. “We have graduates in the arts, but we need students of science, technology and engineering. It takes time for the composition of human capital to change, but it is happening.”
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