As oil prices dived after the global financial crisis of 2008, the UAE was able to seek solace in its conservative stance on budgeting.
Even as prices of US light crude fell from US$145 to $38 per barrel in little over five months during 2008, government spending was still below income. The break-even oil price, the level where prices need to be to ensure the budget can be balanced, is somewhere around $23, estimates the IMF.
Nearly four years later, US oil prices have again slid from above $100 in recent weeks. Brent crude dropped yesterday to $111.15. This time, however, the Government has less room for manoeuvre. The IMF has estimated a break-even price for the UAE of $84 this year. Others estimate the break-even could be higher: Emirates NBD thinks $107 is required. It is a similar situation elsewhere in the GCC. Bahrain needs oil prices at $119 to break even, estimates the IMF.
As the outlook for the global economy has weakened, governments around the region have been pushing up against their fiscal ceilings.
But this does not spell disaster, analysts point out. Most of these nations have sizeable foreign reserves to fall back on. Governments are also capable of issuing bonds to raise cash.
"They are well positioned to take several years of breaching their break-even," says Jarmo Kotilaine, the chief economist of National Commercial Bank (NCB) in Jeddah. "But the risk is when the fundamentals of oil markets change, either through new discoveries or changes in the demand side, such as if oil is eclipsed as a major energy offer."
Higher break-even prices are a reflection of the rapid jump in spending in recent years. For the UAE, the rise is also due to oil production not being increased at the same level as last year.
"We have seen a big increase in the break-even over the last few years, and that's because government spending has risen sharply while non-oil revenues have not kept pace with higher oil prices," says Khatija Haque, a senior economist for the GCC at Emirates NBD.
The bank expects spending across the consolidated budget to reach Dh388 billion (US105.63bn) this year, exceeding expected revenue of Dh380bn.
A large chunk of the spending will go on infrastructure, it says.
The Executive Council gave the go-ahead in January to a host of projects in Abu Dhabi, including Abu Dhabi International Airport's Dh25bn Midfield Terminal. Funds were also set aside for multibillion-dirham projects including the Saadiyat Cultural District development and a raft of power, housing and healthcare schemes.
A further Dh3.4bn is going on pay rises for public-sector workers in addition to existing wages.
There are also large disbursements to companies linked to the government. Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, will get a further cash injection this year after receiving Dh28bn last year.
"A significant portion of the lending is to Mubadala and the Tourism Development Investment Company as Abu Dhabi has a unique model in funding government-related entities direct from its balance sheets, unlike Kuwait and Qatar, which distribute money from their sovereign wealth funds," says Farouk Soussa, the chief economist at Citigroup for the Middle East and North Africa.
Estimating break-even prices is not an exact science.
Dubai has projected spending of Dh32.26bn and a small deficit of Dh1.83bn this year, according to a Dubai sovereign bond prospectus released last month. The federal Government has approved a draft budget of Dh41.8bn for this year, with revenue projected at Dh41.4bn. But one of the biggest challenges is that Abu Dhabi, by far the largest component of the overall consolidated budget, does not release details of its finances.
"There are a number of assumptions we have to make," said Ms Haque. "We forecast consolidated spending for the UAE, estimate how much revenue will come from non-oil sources, estimate oil production for the UAE and how much of this will be consumed domestically at a reduced price."
There are also differences in how economists calculate the break-even price. While Emirates NBD and the IMF base their calculations on the consolidated budget, others focus only on what Abu Dhabi needs oil prices to be to balance its budget. As a result, break-even prices calculated using this method tend to be lower. Citigroup's break-even estimate is $79.60. Economists also diverge on the wisdom of raising spending.
Longer term, the IMF has been urging that costs be brought under control. Instead, it advises more counter-cyclical spending patterns, which means saving during the good times and spending during the tough times.
But the risks attached to higher spending can sometimes be worthwhile, say others. Once complete, Abu Dhabi's Midfield Terminal will accommodate 27 million passengers a year, providing a significant boost to the emirate's transport and tourism sectors and overall economy. Such investments can bring greater returns in the long run even if they test break-even prices in the near term.
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