On 8 February a major restructuring in the federal government of the United Arab Emirates (UAE) was announced. It is the largest government shake-up since the foundation of the country and it comprises the potential outsourcing of most government services to the private sector and the merging of several ministries. This change is the latest move of the UAE to adapt to a reality of low oil prices after it has already curtailed capital spending while also cutting subsidies on fuel and electricity.

Impact on country risk

The sharp fall in oil prices pushed the fiscal balance of the UAE into the red in 2015 (-5.2% of GDP). This is the first time a fiscal deficit has occurred since 2009, as oil typically accounts for 63% of total government revenues. Despite ongoing fiscal consolidation, the fiscal balance is expected to remain in deficit in the medium term as more bold reforms are needed to offset the losses in oil revenues. Moreover, the low oil prices are also squeezing the current account surplus from 14.7% of GDP in 2014 to an expected 2.9% of GDP in 2015 as 64% of it depends on oil revenues. In addition, it is causing slowing economic growth (3% in 2015 while in 2014 4.6% was reported). As such, the UAE needs more economic diversification reforms as well. Nevertheless, the federation has very large buffers that can help cushion the impact of the low oil prices. The country has comfortable levels of foreign exchange reserves (covering 6 months of import) and several sovereign wealth funds, the largest of which, Abu Dhabi’s ADIA, is the world’s second largest wealth fund.

Analyst: Jolyn Debuysscher, j.debuysscher@credendogroup.com