The United Arab Emirates, which has vast investments throughout Europe and funds lucrative orders for European businesses, stands to benefit from axing billions of dollars of fuel subsidies as it fights to control a fiscal deficit amid falling energy prices.
Moody’s rating agency said (27 July 2015) fuel price deregulation measures that will be introduced in the UAE from 1 August are “credit positive for the UAE and Abu Dhabi (Aa2, because they will bolster government finances dented by the downturn in global oil prices.”
Despite progress in diversification, hydrocarbon revenues comprised 75% of the UAE’s consolidated revenues in 2014. “Given our forecast for Brent crude oil prices to average $60 per barrel in 2015, versus $101 in 2014, we expect a 27% drop in consolidated government revenue,” Moody’s said in its report.
In 2015, the UAE will likely face a fiscal deficit of 2.3% of GDP, its first deficit since 2010, and a decline from a 10.3% surplus in 2014, the rating agency said. Phasing out fuel subsidies will partly offset the negative effect of lower oil prices.
Per capita, UAE fuel subsidies equal $730 per resident per year, compared with $2,810 in Qatar (Aa2 stable) and $2,522 in Kuwait (Aa2 stable).
The International Energy Agency estimated the energy subsidization rate (ie, the subsidy as a percent of full cost) for the UAE at 65% for 2013, compared with 78% in Qatar and 77% in Kuwait.
Fitch rating agency said last week the UAE move would likely be followed by copycat measures by other oil-exporting countries that may be suffering from the depressed market for crude oil and gas.
UAE newspaper The National said the UAE decision was welcomed by the business community.
The Middle East in Europe understands the UAE move is good news for European exporters as it secures, at least for now, orders worth hundreds of millions of euros that could have gone under review in the country because of the oil income shortfalls.