While Dubai stimulus fiscal costs are modest, those of the Abu Dhabi sovereign (two per cent of GDP, excluding Adnoc) are financeable. At the same time, structural reforms support potential growth through higher human capital, population, real estate demand and competitiveness. The maximum Dubai fiscal cost would be $1.2 billion (one per cent of Dubai GDP) assuming the entire Dubai Municipality revenues consist of market rate revenues, but the actual cost is likely to be much smaller, said the report.
"Competitiveness gains from the Dubai fee waivers are likely to be modest in the light of generally high costs. The new expatriate visa and foreign ownership rules may support FDI, population growth, private consumption and real estate demand," BofA Merrill Lynch report said.
"Expo 2020 projects, high oil prices, fiscal stimulus and structural reforms are likely to support a growth recovery into 2019. "We expect overall UAE real GDP growth of 1.9 per cent in 2018, from 0.5 per cent in 2017. The headline figure masks a likely stabilisation in hydrocarbon real GDP following a contraction in the oil sector in 2017 due to the Opec deal. We see non-hydrocarbon real GDP growth picking up to 2.8 per cent in 2018, from 1.9 per cent in 2017. Over the medium term, we expect non-oil real GDP growth to increase to 3.5 per cent," said Saliba.
The report pointed out that real GDP growth breakdown by demand for 2017 suggests private consumption contracted by 1.3 per cent year on year, and gross fixed capital formation nearly came to a halt (0.6 per cent from 8.8 per cent in 2016) due to the drag from the hydrocarbon sector.
"The real GDP breakdown by industry shows construction continued to contract by 1.6 per cent, real estate expanded modestly by 2.8 per cent but accommodation and food services grew by 8.5 per cent year on year," said the report.
New foreign ownership law
The foreign ownership law should boost FDI prospects from a low base, as FDI stood at just $10.3 billion (2.7 per cent of GDP) in 2017, but the scope of deregulation is critical. The UAE authorities introduced a landmark law that will allow, by year-end, foreign investors to own 100 per cent of companies in the UAE in specific industries deemed essential, up from 49 per cent previously. Decision on sector inclusion will likely be based on factors such as potential for job creation and technology transfer, and will likely exclude sensitive sectors such as defense. Currently, foreigners are able to fully own a company in designated free-zones. The appeal of free-zones could thus be diminished somewhat, although we note that such zones also benefit from tax, law and regulatory advantages.
New visa system
The new UAE long-term and temporary visa system should facilitate retention of white-collar expatriates. As we expect longer-term visas not to be linked to continued employment, this may increase expatriate incentives to acquire property and support real estate demand. This would support consumption and reduce remittance outflows (Dh129 billion or 9.3 per cent of GDP in 2017). Improved prospects for human capital accumulation could modestly raise medium-term non-hydrocarbon potential growth.
The UAE authorities adopted a new system for entry visas for investors and professional talents in medical, scientific, research and technical fields, providing them with long-term visas of up to 10 years. The new visa system will also introduce five-year and 10-year visas for foreign students, and extends to two years the residency time for dependent students after completion of university studies.
The UAE authorities also introduced a number of visa facilitations for visitors, residents, families and people overstaying their visas. A new six-month visa will be introduced for job-seekers who overstayed their visas but wish to work in the UAE. This should reduce the probability of frictional unemployment leading to more permanent expatriate departures from the UAE, and improve employment prospects.
Worker insurance scheme
The introduction of a new insurance scheme for workers' guarantees is likely to provide a one-time boost to corporate profits. However, the timing of implementation remains unclear. Also, corporates may choose to hoard cash rather than invest at this stage. Should corporates invest, we estimate this could lead to a one-off 0.1 per cent boost to the UAE non-hydrocarbon real GDP growth.
The previous mandatory deposit of Dh3,000 per worker, essentially a bank guarantee for employment, has been replaced by a new insurance scheme costing employers only Dh60 annually per worker. This would allow businesses to recover Dh14 billion, which is the value of current guarantees paid by employers.
Fee waivers improve competitiveness
Dubai authorities reduced the fee on total sale value for hotels from 10 per cent to seven per cent, modestly improving the competitiveness of the hospitality sector. Dubai authorities waived 19 fees imposed on the aviation industry and aircraft landing permits. Authorities also waived a four per cent fee on delays in property registrations imposed by the Dubai Land Department. Authorities reduced the market rate (municipal charge on businesses) from five per cent to 2.5 per cent. Plans to freeze private school fees for a year were approved.
Dubai introduces fiscal loosening
The 2018 Dubai central government budget appears expansionary in pursuit of implementation of Expo 2020 commitments. Compared to fiscal surpluses realised over 2014-2017, the 2018 budget pencils in a deficit of 1.55 per cent of GDP (Dh6.2 billion). Budgeted spending is targeted to increase by 19.6 per cent, with infrastructure spending targeted to increase 46.5 per cent to stand at 21 per cent of total. Budgeted revenues are targeted to increase by 12.5 per cent due to Dubai's share in VAT and excise dues, and higher fee revenues."While there are a number of uncertainties surrounding meeting tourism targets and spending forecasts, we estimated Dubai Expo could raise Dubai's GDP growth over the period of the fair in 2020-21 by 2ppt through higher job creation, consumption and tourism flows," Bank of America Merill Lynch said.
Abu Dhabi stimulus to boost activity
Abu Dhabi authorities approved a Dh5 billion (six per cent of Abu Dhabi GDP) three-year stimulus package. A working plan for allocations would be drawn up within 90 days. "While we await full details to pass judgment, we estimate the stimulus could add 0.4ppt annually to Abu Dhabi real non-hydrocarbon GDP growth (equivalently, 0.2ppt to UAE real non-hydrocarbon GDP growth). The annual stimulus fiscal cost of $4.5 billion should be financeable in the context of high oil prices. Adnoc also recently announced a five-year investment plan of Dh165 billion to expand downstream capacity alongside global partners, which, if realized through domestic rather than overseas investments, could add annually a further 1.1ppt to Abu Dhabi real non-hydrocarbon GDP growth," Bank of America Merill Lynch email@example.com
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