Goldman Sachs warned on September 11 that the oil price was likely to continue to slump because of unprecedented amounts of oil in storage and weakening demand from China. This led some of the more emotional commentators to declare that a regional economic catastrophe was getting closer.
Even Goldman, however, thinks it is unlikely that the oil price will slump as low as US$20 per barrel. It says the price for a barrel of US-benchmark West Texas Intermediate will range between $38 in one month and $45 in 12 months.
However, even if the price of one of the UAE’s most important exports were to slump, many commentators believe that the underlying trends in the country’s economy are still strongly positive.
At the same time, it is important to step back and take a look at the big picture in its various aspects.
Emirates NBD’s senior economist Jean-Paul Pigat was quoted in early August as saying that “growth in the UAE’s non-oil economy is proving resilient in the face of a challenging regional and global economic environment”. The United Nations’ latest global agenda for sustainable development, Transforming Our World: the 2030 Agenda for Sustainable Development, is based on five pillars – people, planet, prosperity, peace and partnership. The agenda envisions “a world in which consumption and production patterns and use of all natural resources – from air to land, from rivers, lakes and aquifers to oceans and seas – are sustainable”.
Badr Jafar, the founder of the Pearl Initiative and the chief executive of Crescent Enterprises, has added the private sector to the agenda’s five pillars, highlighting the importance of empowering women, putting the environment at the heart of sustainable development and spreading the benefits of sustainable development to all.
What does this have to do with the price of oil? Since the first exports of oil from Abu Dhabi in the early 1960s, the government has pushed hard to diversify the economy. This diversification has been successful when measured against other GCC countries, but government revenue is still highly dependent on hydrocarbons. Soaring GDP has meant the growth of a private sector dominated by expatriate labour, while the public sector has been a key source of employment for Emiratis.
But with the slump in the price of oil looking to be a long one, the government has made some bold steps that illustrate its confidence that the economy is ready for increased competition. Petrol deregulation has removed a significant burden on the government purse. If a more general tax system – whether a GCC VAT system or a UAE corporate tax system – is introduced, it will significantly broaden government revenue. While income from hydrocarbons will still be important, the rebalancing of government expenditure and revenue will reset the national economy. The government will be able to target support for the private sector, growing the manufacturing and services sectors – which are a crucial driver of employment. Entrepreneurs will be increasingly motivated by the need to make a profit – which is, in the end, the only way to build a sustainable economy.
C N Brunnschweiler of the Swiss Federal Institute of Technology and E H Bulte of the Oxford Centre for the Study of Resource-Rich Economies suggest that resource wealth correlates with slightly higher economic growth – as long as it is used properly.
The investment across the GCC in infrastructure has been enabled by the production of crude oil – and the resulting development of high-quality roads, ports, airports, telecommunications and social infrastructure will lead to significant investment and growth opportunities. The growth of the UAE’s non-oil economy is an important indication of our economic future – a smart economy that is based on technology, that harnesses the power of the region’s intellectual capital, that sustainably uses all of its resources and that offers equal opportunity for all.
Vikas Papriwal is the head of markets at KPMG in the UAE.
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