Oil Slump May Prompt U.A.E. Spending Cuts, Central Bank Says

The United Arab Emirates may cut government spending as a result of the slump in oil prices, Central Bank Governor Mubarak Rashed Al Mansoori said.

The decline in the government’s oil revenue “may trigger further fiscal consolidation, albeit at a gradual pace, to preserve priority spending in support of non-oil growth,” Al Mansoori said at a conference in Dubai on Monday. Oil accounted for almost a third of the nation’s gross domestic product last year, government data show.

The price of Brent crude has dropped more than 40 percent in the past year, putting a strain on economies in the six-nation Gulf Cooperation Council, where governments rely on income from oil to fund spending. The U.A.E. banking sector has lost 56 billion dirhams ($15.25 billion) in government deposits since September last year, National Bank of Abu Dhabi Chief Executive Officer Alex Thursby said last month.

The global economic slowdown may curb growth in the U.A.E.’s non-oil GDP, "necessitating prudent measures" to limit the effect, Al Mansoori said. Growth in the second-biggest Arab economy may slow to 3 percent this year, he said, from 4.6 percent in 2014.

“We are still going ahead with our investments," Al Mansoori said. "Some people may argue that for governments like the U.A.E., maybe it’s an opportune time to execute necessary projects at a lower cost.”

Lending

The government is seeking to increase institutional support for lending to small-to-medium sized businesses and is pushing ahead with plans for a bankruptcy law, Al Mansoori said. Non-performing loans declined to 6.3 percent of total loans as of September, down from 8.6 percent in the second-half of 2014, he said.

As Federal Reserve policy makers lay the groundwork to raise borrowing costs for the first time since 2006, the U.A.E. will make a “gradual adjustment to the policy rate to ensure the stability of the exchange rate peg, which is our continued commitment,” Al Mansoori said.

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