UAE may fall back on foreign assets to cut deficit


After years of building up these assets because of substantial budget surpluses, the country might reverse this policy in 2009 and use part of the returns to cover any shortfall and avert borrowing, they said.

"I know the UAE is planning to issue bonds but these are basically intended to fund infrastructure projects not the budget," said Ziad Dabbas, financial advisor at the government-controlled National Bank of Abu Dhabi.

"Actually, I don’t think there will be a real deficit this year despite the sharp fall in oil prices and the country’s production as well as higher spending. In previous years, the deficit was only theoretical because the UAE usually does not calculate returns from its overseas investments in the budget."

In a recent study, the National Bank of Kuwait (NBK) said a massive surplus in the UAE consolidated finance account (CFA) in 2008 could totally disappear in 2009 as a result of the plunge in oil prices as well its output. But it added the disappearance of the surplus or even a deficit would pose no problem to the country given its enormous assets abroad.

"Further strong government spending growth in the UAE this year is likely to result in a sharp turnaround in the budgetary position," the study said.

Assuming an average oil price of $ 50 (Dh183.5) a barrel this year, NBK expected the CFA surplus to fall from 15 per cent of GDP in 2008 to effectively zero in 2009.

"Although a major reversal, this trend provides little meaningful threat to the medium-term integrity of the government’s overall financial position. A small deficit would pale beside the near $ 100 billion of budget surpluses accumulated by the UAE government over the past four years," it said.

"More importantly, these (official) government figures on revenue and surpluses exclude the government’s investment income earned from its overseas assets as well as profits from Adnoc. Inclusion of these huge off-balance sheet items could add between 10-20 per cent of GDP to the headline budget surplus figure — still implying a very large underlying surplus in 2009."

The bulk of the UAE’s overseas investments are based in the US and other Western countries and controlled by the Abu Dhabi Investment Authority (Adia), one of the largest sovereign wealth funds in the world.

Recent estimates by the US Council on Foreign Relations showed Adia’s assets plunging by about $ 183bn as a result of the global financial crisis in 2008. But there was a net inflow of nearly $ 59bn because of the sharp increase in UAE’s oil export revenues, which hit an all-time high of $ 92bn.

At the end of 2008, Adia was believed to be in control of about $ 328bn compared with nearly $ 453bn at the end of 2007, CFR said.

The decline depressed the country’s investment income to nearly Dh30bn in 2008 from about Dh46.3bn in 2007, according to the IMF.

Adia’s assets began to grow rapidly nearly four years ago because of swelling surpluses in UAE’s CFA, estimated at $ 129.7bn during 2005-2008. A surplus of nearly $ 82bn was recorded in 2008 alone despite a sharp increase in expenditure, according to independent estimates.

The UAE has not yet published actual CFA estimates for 2008 but data for the previous two years showed there was a combined surplus of Dh145bn.

"A break-even oil price for the UAE budget is about $ 45 a barrel according to the IMF estimates. Since oil prices are expected to average nearly $ 50 this year, the CFA budget should theoretically be in surplus. But you have to take into account the cut in oil output.

"The fact that the government has traditionally boosted actual expenditure by nearly 20 per cent annually over the past few years, I am sure this year spending could be increased by more than that ratio because of the global crisis," an Abu Dhabi-based bank manager said.

"I think there might be a small deficit, but it is not a problem at all. It will be easily covered by return from the country’s assets abroad." But according to the Saudi American Bank (Samba), UAE’s CFA could record a tiny surplus on the grounds oil prices could average $ 57 a barrel.

"Despite the higher government spending, with oil prices now expected to average $ 57 per barrel in 2009, the consolidated fiscal accounts for UAE are projected to remain broadly in balance, after years of large surpluses," said Samba.

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