The UAE’s fiscal surplus is expected to narrow due to anticipated lower oil prices, according to the National Bank of Kuwait (NBK). However, the country's overall economy remains positive despite rising external risks, with GDP growth expected to average 4.2% due to higher oil production during the 2025-2026 period.

While hydrocarbon revenues will still get a boost from higher oil production levels, the country’s overall fiscal surplus is projected to slip from an estimated 5.5% of the GDP in 2024 to 4% in the subsequent two years, the bank said.

The downside risks to the outlook, ranging from lower oil prices to trade-tariff-induced deterioration in global trade, predominate in the current climate, potentially dampening investor sentiment.

"Although downside risks to the UAE’s externally-exposed economy have increased, our base case outlook for 2025-26 remains relatively upbeat with GDP growth averaging 4.2% in 2025-26 led by higher oil production, while non-oil growth will slow but is underpinned by continued reform and investment initiatives, strong international competitiveness metrics and healthy if narrowing macroeconomic balances," NBK said in a report.

The projected fiscal surplus decline comes as the UAE government is allocating more funds for various initiatives between 2025 and 2026. Over the two-year period, government spending could rise by 3.6%, with higher budgets slated for infrastructure, diversification efforts and social benefits. "The attractiveness of the UAE for tourists, and its economy to labor, capital and business, underpinned by its investment and diversification agenda, provide underlying resilience," NBK said.  

Lower oil prices, coupled with slower external demand and impact of the US tariffs on iron, steel and aluminium, could also cause the country’s current account surplus to fall to 2.3% of the GDP by 2026.

The growth in the non-oil sector could also slow, while property prices could ease due to higher supply and elevated interest rates. According to the bank, interest rate cuts would support demand for real estate, though higher supply and stricter regulations could weigh on sales and price growth over 2025-26.

(Writing by Cleofe Maceda; editing by Seban Scaria) seban.scaria@lseg.com