Abu Dhabi Spending Cuts May Have Exacerbated Oil-Led Slowdownby
The latticed dome of the Louvre Abu Dhabi will provide an Arabian home for gilt-framed European masterpieces when it opens later this year. Those who prefer contemporary Middle Eastern art will have to wait far longer for the emirate’s proposed Guggenheim.
Abu Dhabi’s rulers designed the cultural hub on Saadiyat island along with its marina, golf course and luxury hotels during oil’s boom years. With crude prices at less than half their peak, the government is now back-peddling fast -- too fast for some economists who say the austerity drive will cause unnecessary pain for an emirate that owns the world’s second-biggest sovereign wealth fund.
“It’s pretty heavy fiscal consolidation,” said Zeine Zeidane, the International Monetary Fund’s mission chief to the United Arab Emirates, which Abu Dhabi leads as the capital and the richest sheikhdom. “I don’t see they need to do that much in 2016,” he said in an interview last week. “They certainly need to balance their budgets sometime in the medium term, but they have time.”
Abu Dhabi, which sits on 6 percent of global oil reserves, cut spending by a fifth in 2015 and plans a further 17 percent reduction this year, according to the government’s bond prospectus. That’s more than a proposed 14-percent cut in Saudi Arabia, which is facing widening budget deficits and must meet the demands of a much bigger population.
Fuel prices have been deregulated in line with the rest of the U.A.E. Authorities also increased utility rates to offset the slump in oil and gas revenue, forecast to fall this year to 43 percent of Abu Dhabi’s total from almost 70 percent in 2012. Brent crude declined to below $30 a barrel in January from a high of about $125 in 2012.
The IMF predicts a rapid deceleration in economic growth to 1.5 percent, from 4.3 percent last year, and non-oil industries may grow at an even slower pace. Applying the brakes so sharply could put at risk progress already made toward diversifying the economy beyond oil, according to Razan Nasser, senior economist at HSBC in Dubai.
“They are feeding the slowdown and it is weighing on growth,” she said. “They have modest budget deficits and a large asset position and can afford to be a bit more counter-cyclical.”
Neighboring Dubai, which has little oil, is still investing in its infrastructure ahead of the Expo 2020 international trade fair. The IMF estimates it will expand 3.3 percent before growth accelerates to more than 5 percent by 2020.
Abu Dhabi’s executive council, which makes decisions on public-project spending, didn’t respond to e-mailed questions.
Chavan Bhogaita, head of Market Insight and Strategy at National Bank of Abu Dhabi, said the policy response is warranted given the “sheer magnitude of the oil price shock.”
“Shouldn’t we be welcoming many of the tangible steps being taken to adapt to the challenging environment as they will put the emirate -- and indeed the country -- in a far stronger and more sustainable financial position?” said Bhogaita. “I certainly do.”
U.A.E. officials have reiterated that the country’s economy is strong enough to weather the slump in oil prices. In widely circulated remarks, Mohamed Bin Zayed Al Nahyan, Abu Dhabi’s crown prince, said last year that if authorities’ current policies were right, Emiratis should “celebrate” when they export the last barrel of oil in 50 years.
Some economists, including Mathias Angonin of Moody’s Investors Service, expect Abu Dhabi to ease off its spending cuts.
Fiscal consolidation could slow amid “pressure” to support growth, Angonin said this month in an interview, after Moody’s affirmed Abu Dhabi’s sovereign debt rating at Aa2 citing “very large fiscal buffers.”
“We’ve seen a very strong start for Abu Dhabi’s fiscal consolidation,” he said. “This year and going forward this fiscal consolidation effort will slow.” Moody’s expects fiscal reserves to remain well above 200 percent of gross domestic product over the next few years, even if there’s no major recovery in oil prices.
The royal family led by Sheikh Khalifa bin Zayed Al Nahyan envisaged turning Abu Dhabi into a financial and high-end tourism destination that could generate revenue long after the emirate’s oil is gone. As a start, a finance hub has been built, as have office complexes and a global airline, Etihad.
Among the centerpieces were high-profile projects like the museum development, where plans for the Guggenheim, designed by Frank Gehry and to be surrounded by the Persian Gulf on three sides, are now on hold indefinitely.
It’s two years since contractors bid for work on the Guggenheim, which is designed to resemble a collection of cone-like structures and boxes and would build its own collections as well as displaying work loaned by the New York mother institute.
But the Tourism Development & Investment Co. is yet to select any firm, two construction company executives said, asking not to be identified as they aren’t allowed to discuss clients publicly. TDIC didn’t respond to requests for comment.
Construction of the Louvre was more advanced by the time the oil-crunch started to bite, and it was too late to order a go-slow, according to the chief executive officer of one of the firms that bid for work on the museum complex.
While Abu Dhabi’s decision to prioritize and scale back projects is understandable, it should mean “reduced spending, rather than turning the tap off altogether,” said David Dudley, head of Jones Lang LaSalle’s Abu Dhabi office. The emirate could lose “much of the momentum it has made and we will enter a more damaging downturn,” he said.
Abu Dhabi National Oil Co. has made 2,000 expatriate employees redundant since the start of the year and is looking to cut another 3,000 jobs this year, taking the total to nearly 10 percent of its workforce, MEED reported citing industry sources May 16. Etihad Rail, the developer and operator of the U.A.E.’s $11 billion rail network that will eventually connect the nation to five Gulf neighbors, has slashed about 30 percent of its workforce.
“Heavy-handed” spending cuts are probably motivated by a desire “to get back to strong fundamentals as soon as possible,” the IMF’s Zeidane said. “That should be the strategy but it should have a gradual pace.”