How will the UAE 2016 budget impact construction?

As the UAE cabinet’s 2016 budget stresses the importance of social infrastructure development, Neha Bhatia investigates how it is likely to impact the economics of construction during the coming year

Money matters: The UAE’s budget for 2016 is 1.2% lower than that allocated for 2015.
Money matters: The UAE’s budget for 2016 is 1.2% lower than that allocated for 2015.

The UAE cabinet approved a federal government budget for 2016, estimated at $13.2bn (AED48.5bn) with zero deficit, on 25 October, 2015. According to the budget, spending in 2016 will be 1.2% lower than in 2015, when the allocated budget amounted to $13.3bn (AED49.1bn).

Over half the national funds for 2016 have been allocated to sectors such as education (21.2%), social development (15.5%), public services (11.1%), and healthcare (7.9%). The budget has also allocated amounts for sectors such as defence, housing, public safety, environment, and culture, although values for these are yet to be announced by the cabinet.

HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, and Ruler of Dubai, said the UAE’s priority with the budget is to invest in Emiratis, and to strengthen the UAE’s brand.

“Investing in Emiratis and meeting their needs are the basis of government work, and [the government] has a priority in the National Agenda to reach the goals of the UAE 2021 Vision. Our priorities in the 2016 budget will be geared towards social development, education, and health,” HH Sheikh Mohammed said, according to state news agency, WAM.

To this end, the cabinet adopted the National Emiratisation strategy in the banking and insurance sectors to improve nationalisation levels. By issuing policies and initiatives, the government will create a work environment that attracts Emiratis to public and private sectors.

Given the UAE’s target to generate 24% of its electricity from clean energy sources by 2021, the cabinet also approved the submission of the UAE’s Intended Nationally-Determined Contribution (INDC), an outline of actions the country aims to take to combat climate change under the United Nations Framework Convention on Climate Change (UNFCCC). The proposed climate action plan reflects the UAE’s economic diversification strategy and its commitment to sustainable development.

Furthermore, as part of its 2016 budget announcement, the cabinet approved the inauguration of an office for the Arab Tourism Organisation in the UAE, which will help to promote the country’s tourism credentials regionally and internationally, and exchange information between potential investors.

The cabinet also endorsed the UAE’s commitments to the Trade Facilitation Agreement (TFA) of the World Trade Organisation (WTO). The agreement contains provisions for expediting the movement, release, and clearance of goods, including goods in transit.

Although the intricacies of the budget are yet to be revealed, it is clear that the UAE is eager to diversify its economy away from conventional income sources, as the weak oil price persists. Shortly before the UAE’s budget for 2016 was revealed, the International Monetary Fund (IMF) warned that the ongoing slump in crude prices could result in irreversible catastrophes for the oil-dependent GCC.

According to IMF’s Regional Economic Outlook for the Middle East, North Africa and Central Asia report, published on 21 October, 2015, oil prices dropped from around $110 per barrel to less than $50 per barrel between July 2014 and January 2015. The 2015 oil price is expected to average out at $52 a barrel, increasing gradually to about $63 by 2020.

However, “considerable uncertainty surrounds these figures”, the report warns, noting: “Risks to global growth remain tilted to the downside, not least because of the recent bout of financial market and exchange-rate volatility.

“It is unclear how quickly Iran can ramp up production while oil output in conflict-affected countries is likely to remain volatile. Growth in the GCC is expected to slow in the short term as countries initiate fiscal consolidation.”

The IMF adds: “Non-oil growth is projected at just below 4% for 2015 and 2016, a reduction of [1.75%] compared with 2014, as fiscal adjustment, or the anticipation thereof, begins to have effects, notably in Saudi Arabia and the UAE.”

Fortunately for the UAE’s construction industry, the IMF is less than bleak about the country’s revenue forecasts following the implementation of financial consolidation measures.

“Oil exporters will need to adjust their spending and revenue policies to ensure fiscal sustainability, attain inter-generational equity, and rebuild space for policy maneuvering,” the report states.

“Countries with larger [financial] buffers can adjust more gradually so as to contain the negative impact on growth. Countries without available buffers have no choice but to adjust quickly, irrespective of their cyclical position.

“For most countries, the fiscal measures currently being considered are likely to be inadequate to achieve the needed medium-term fiscal consolidation. Apart from Kuwait, Qatar, and the UAE, under current policies, [GCC] countries would run out of buffers in less than five years because of large fiscal deficits,” the report adds.

The UAE’s 2016 budget was, perhaps, prepared with these concerns in mind, and its emphasis on social development is being applauded by industry experts.

Craig Plumb, head of research for JLL’s activities in the MENA region, shares his views on the budget with Construction Week.

“It’s a balanced budget,” Plumb explains. “They [Emirati authorities] are not expecting to run into a deficit, and to achieve this balance, they’re looking at other measures that could increase revenues as well. This usually means some form of taxes and charges, but it’s hard to say since no details have been provided about the budget yet.

“I think the important point is that the budget is looking for balance; they’re not expecting a big deficit, and spending is down. In these circumstances, you have to prioritise [resources], and [visibly], the focus is on things like education, social development, and healthcare, which seem to account for up to 55% of the total spending,” Plumb continues.

“They haven’t mentioned spending on infrastructure, so you would have to assume [it] would be lower than in 2015.”

In practical terms, this still spells good news for firms specialising in the design, construction, and development of the UAE’s social infrastructure. The situation gets better when viewed within the broader context of emerging private-sector involvement, as is best exhibited through the Roads and Transport Authority’s (RTA) increasing preference for public-private partnership (PPP) projects.

“New modes of funding will be needed for the infrastructure projects which are approved for development, so there’s definitely more scope for PPPs,” Plumb says. The IMF’s remarks about the UAE highlight this trend. “There are two strengths to the country’s economy: one is the [UAE’s] diversification into [non-oil] economic sectors, such as tourism and finance. The second strength is the involvement of the private sector, which is clearly higher here than in other countries in the region,” it notes.

“GDP projections for the UAE are also relatively stable at 3.1% next year vis-à-vis 3% for 2015,” Plumb adds.

Energy pricing reforms, as implemented in the UAE, have reduced the gap between local prices and international benchmark prices. Even so, the IMF report points out that the direct fiscal savings of these measures are relatively modest because in most countries, the cost of low energy prices is implicit, and more work needs to be done in these areas.

Contrary to market concerns, however, Plumb is more optimistic than to believe this combination of socio-economic factors will lead to a slowdown in the UAE’s projects.

“I don’t think anyone’s talking about a massive slowdown. The GDP growth is stable at this point. The key part is for the government to find alternate sources of revenue, since there is a realisation that oil prices will be at a lower level for some time. Adjusting to that means the government has to prioritise projects, and be more discerning about which ones go ahead [immediately].”

Plumb concludes: “One of the challenges the UAE has had is the strength of the US dollar. That has had a negative impact on tourism and spending in the [Emirates], since tourism leads to retail sales. The government is investing a lot of its resources into theme parks, family attractions, and museums, as part of its tourist infrastructure efforts, which I think still [represent] a priority.”

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