Government spending has helped to keep the wheels of the Arabian Gulf’s non-oil economies greased in the past two years as oil prices crashed, but that resilience may wane if the price of crude does not rebound soon, according to the investment bank Alkhabeer Capital.
Deficits in countries in the region including the UAE and Saudi Arabia have widened over the past year as the more than 60 per cent drop in oil prices empties coffers and forces governments to dip into sovereign wealth funds and borrow more money to keep spending on infrastructure and social services.
“Growth in the non-oil sector continues to outpace the rate of expansion seen in the region’s hydrocarbon sector. It cannot continue to remain largely resilient to low oil prices for a prolonged period, especially if we consider the high reliance of the Gulf economies on government expenditure,” the investment bank wrote.
“The non-oil sector has started showing signs of weakness, particularly recent PMI readings in Saudi Arabia and the UAE, which are close to multiyear lows.”
Dubai’s economy began to shrink last month for the first time since 2010, according to the latest purchasing managers’ index, a measure of the health of the non-oil economy.
The Dubai Economy Tracker, a monthly assessment of business activity in the emirate provided by Emirates NBD, recorded a score of 48.9 in February. Any score below 50 indicates that the economy is contracting.
That was the first month since the data series began in 2010 that the index has slipped into negative territory. Official GDP data lags by up to a year, meaning that policymakers are forced to look to informal indicators of economic growth to gauge the state of the economy.
The UAE cut public spending by 21 per cent in the year to last September, the last period for which Ministry of Finance data is available. Saudi Arabia also announced spending cuts in this year’s budget.
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