Recent analysis by one of Dubai’s top banks paints a tight budget picture in the UAE, with a ‘break even’ Brent oil price for fiscal purposes of $107 a barrel for 2012.
“The UAE’s breakeven oil price has risen sharply over the last five years, as expenditure has grown from around 18 percent of GDP in 2007 to an estimated 30 percent of GDP in 2012,” the Emirates NBD report stated. “At the same time, non-hydrocarbon budget revenues have declined from 25.5 percent of total revenue in 2007 to an estimated 20.8 percent of total revenue in 2012.
Many GCC countries have taken high oil prices and instability in other Arab countries as a cue to ramp up domestic spending, with huge public sector salary hikes across the GCC and a massive $120 billion social spending program underway in Saudi Arabia.
Emirates NBD says current prices “should give the authorities greater comfort to push ahead with recently approved infrastructure spend.”
Benchmark forward-dated Brent is currently trading at $121.80 a barrel, enough to keep the UAE well in the black for the time being. However, any or all of a resolution of the international crisis of Iran’s nuclear ambitions, increases in production capacity and a period of weak economic data could see prices slump.
“For the GCC oil producers, the additional export revenues should provide further comfort to push ahead with planned expenditure, particularly for the UAE, which has a relatively high break-even oil price and has been more conservative with spending growth in recent years,” said the report.
“Oil revenues have thus become a more important source of budget revenue, and the fiscal position is more vulnerable to a sharp decline in oil prices than was the case five years ago,” said Emirates NBD.
The bank believes that overall GCC production will “at best” remain stable, and may decline as Libyan production reaches its pre-war peak.
The report is something of an outlier. A recent analyst poll taken by Reuters estimated a current UAE break-even oil price of just $86 a barrel.
