Highest spending growth in years
Dubai approved on Sunday its 2018 budget, with a planned 20% increase in total expenditures and a widening deficit of AED6.2bn (1.6% of GDP). Dubai’s strongest spending growth in many years is driven mostly by 47% Y-o-Y growth in infrastructure spending as the government pushes ahead with Expo 2020 projects, with 42% of the total investment spending assigned for Expo projects. These include the “main Expo building, and supporting services (roads, bridges, and sewage), transportation and metro lines as well as work to prepare the entire area for post-expo events and supporting events tourism.” Moreover, the government is increasing spending on wages by 9% Y-o-Y (positive real growth of 3.5%, according to our inflation estimates) and is planning to create 3,100 new jobs.
Supports favourable UAE macro outlook
The strong increase in spending, mostly devoted to infrastructure feeds into our positive stance on Dubai macro, in particular, and the UAE, in general, as increased fiscal spending will maintain a healthy growth environment. This is especially so with most projects, whether the construction of the new airport or the extension of the metro line, feeding into the country’s fundamental growth story. We, therefore, expect Dubai’s economic growth to continue outpacing that of Abu Dhabi – which is likely to maintain a conservative fiscal stance, given low oil prices. Strong expansionary fiscal spending is likely to complement a recovery in tourism activity, as well as a healthy pipeline of investment projects, including in the key construction sector. We expect growth to be dented slightly in 1H18 due to the introduction of the value-added tax (VAT) on 1 January. Nevertheless, we expect Dubai’s real GDP growth to accelerate to 3.5% in 2018 from an expected 3.2% in 2017.
Widening deficit not a concern, for now
The aggressive increase in spending, coupled with the continued decline in revenue, is likely due to some restructuring of revenue items due to project financing for Expo projects, will lead to the second consecutive fiscal deficit. Moreover, it does not seem that the budgeted revenue include the Emirate’s share of expected VAT revenue. As with last year, part of the deficit is set to be funded by project financing; hence, the Dubai government is unlikely to come to the market with sizeable bond issuances. It remains to be seen, though, how the remainder of the deficit will be dealt with. Rising debt, coupled with rising US interest rates and lower revenues from some key GREs (especially Emirates Airlines), is something we are closely watching. It is important to note though the emirate continues to run a primary surplus at AED2.5bn (0.6% of GDP).