ABU DHABI: Abu Dhabi’s fiscal deficit will widen significantly in 2016, as oil prices remain lower for longer, according to Moody’s the ratings agency. The emirate will run a fiscal deficit of 14 per cent of GDP this year, the ratings agency expects. Fitch estimates that Abu Dhabi ran a fiscal deficit of 13.2 per cent in 2015.
Major falls in oil and natural gas revenues are driving the deficits, with receipts falling from 26.6 per cent of GDP to 17 per cent of GDP from 2015. Oil revenues are expected to fall by about 41 per cent this year from their 2014 high, Fitch expects.
Abu Dhabi has a breakeven oil price of $60 per barrel, which Moody’s describes as “low compared to most GCC peers, but still above the market price that is likely to prevail until at least 2018.”
Oil scraped a 12-year low below $30 per barrel in January this year, as OpecC member states produced 33.1 million barrels of oil per day, a historic record. Russia and Saudi Arabia agreed to freeze production at January levels at a meeting this week, but analysts expect this to have a limited impact on the oil price. Abu Dhabi is the largest contributor to the federal budget. Oil sector activity accounts for half of all economic activity in the emirate.
Abu Dhabi has a longstanding arrangement with the Abu Dhabi Investment Authority (Adia), the state-owned sovereign wealth fund with more than $600 billion in assets under management, which allows it to withdraw funds to pay down its deficit in extraordinary circumstances. The UAE aims to approve a federal debt law and issue new foreign debt next year, a government minister said last week.
Growth in the emirate will slow to 3.1 per cent this year, down from 3.4 per cent last year, Moody’s estimates. The UAE will be able to finance its deficit by drawing down on assets for “at least five to ten years”, Moody’s said.
While Abu Dhabi manages sovereign wealth equivalent to around 400 per cent of its GDP – enough to last the emirate 23 years, at current spending levels – liquidating assets hurts sovereign wealth funds’ ability to earn income from investing abroad. Adia has a large portfolio of foreign investments, which earned a 7.4 per cent annualised rate of return over the 20 years to 2014, it said in an annual report.
Both the UAE and Abu Dhabi have very low levels of debt. Abu Dhabi has outstanding debt equivalent to around 4 per cent of GDP, Moody’s said, giving the emirate considerable space to issue new debt.
