What implications does the fall in oil prices hold for the wider economy?

Riding out the oil decline

The fall in oil prices has deservedly dominated the business pages for the past few months. While the steep drop in barrel prices is still manageable for the UAE economy as a whole, it could in time have some knock-on effects.
Obviously any SMEs that work in the oil and gas sector (for example in the supply chain to the big firms) may well be feeling the impact already. But what other sectors are likely to be affected?
The first – and fundamental – point to make is that the UAE has considerable protection from any impact from the plunge in oil prices, simply because our economy is more diversified than many others. In 2013, the hydrocarbon sector accounted for 38.9 per cent of our nominal GDP: lower than for other GCC countries. UAE economic growth strengthened to 5.2 per cent in 2013, from 4.7 per cent in 2012 and 4.9 per cent in 2011. Non-oil growth drove this acceleration, with real growth of 5.4 per cent against the oil economy’s growth of 4.8 in 2013. (The data for 2014 is still not finalised, but many commentators are still comfortable that non-oil growth will be solid in 2015, with typical predictions around the 5.6 per cent mark.)

The fall in oil prices would therefore have limited risks to the UAE’s massive investment plans, many of which directly involve SMEs in sectors such as construction, and also indirectly impact on sectors such as marketing, financial services and hospitality. The key projects, which remain vital for the UAE’s development objectives, aim to at least meet current economic requirements and hopefully increase the economic base, including further diversification. The UAE’s wide funding sources and strong forex reserves are also positive factors in support of a ‘business as usual’ investment programme. However any further and sustained weakening of the oil price could see some of the more peripheral projects potentially being reviewed or temporarily put on hold, but core projects will almost certainly continue largely unaffected. Expo 2020 related work for example, is likely to be ring-fenced.
However the UAE is not an island, and while we may stay healthy, the wider region may be under more pressure. According to the Middle East Economic Digest, if oil averages $65 per barrel during 2015 – it is currently trading well below this – then GDP across the GCC will shrink by an estimated 13 per cent. SMEs who export widely across the region, or who have a significant customer base across the GCC, could experience falls in business as a result.
Other sectors like to feel any pressure includes real estate, where the exuberance of 2013 and 2014 won’t be repeated. Indeed many commentators are now talking about a 10 per cent fall in the market, which will place firms operating in the sector on tighter margins.
Sectors likely to remain immune include those where investment is already seen as essential – for example, see the article elsewhere in this issue covering the backing now being given to the technology sector, and other key targets identified by the government, such as healthcare and healthcare tourism, aviation, alternative energy and biotechnology.

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