Government takes effects of global downturn into account in grand plan for diversification
Abu Dhabi checks its stride
Abu Dhabi is reassessing some goals in its 2030 Economic Vision, acknowledging slower economic and population growth due to the fallout of the global economic crisis. The reassessment, outlined in the prospectus of a government-guaranteed bond, reflects a series of modifications to plans by Abu Dhabi insitutions over the past two years.
The changes mainly involve delaying or adapting infrastructure projects to match new economic realities, but officials stress that the overall outlines of the 2030 plan remain intact. They also note that the plan was designed to be updated regularly according to macroeconomic conditions. "As a result of the global financial crisis and its impact on Abu Dhabi's economy in 2009, a reassessment of certain goals set out in the 2030 Economic Vision, including in particular the planned GDP growth and the population assumptions underlying the 2030 Economic Vision, is being undertaken," says the prospectus. The document was distributed to investors this month in connection with a $1.5bn bond issued by Waha Aerospace.
The development of Saadiyat Island, the new Khalifa Port and additions to the Abu Dhabi International Airport are largely on track but newer projects, including later phases of the carbon-neutral Masdar City, are expected to be postponed, according to the Waha prospectus. The Masdar project, which is backed by Mubadala Development, has been undergoing a strategic review since last year. The priority now, according to the prospectus, is prudence and tailoring development to market demand while finishing projects already under construction.
"As a prudent business, we will continue to carefully examine projects that have been under discussion but have not been announced as we continue to monitor the markets and move forward with those projects that are sound and will provide long-term benefits to the UAE," said a spokeswoman for the Tourism Development and Investment Company (TDIC), developer of Saadiyat Island. Certain planned public transport improvements are "likely to be deferred given the slowdown" in population and GDP growth, the prospectus says. Although no projects are named, the emirate's two main public transport initiatives are a metro system for Abu Dhabi city and a tram serving Al Raha Beach and Khalifa City.
Officials have hinted at the review on several occasions. In February, Mohamed Omar Abdullah, the Under Secretary of the Abu Dhabi Department of Economic Development, acknowledged that GDP growth rates of 7 per cent a year until 2015 and 6 per cent a year thereafter used as the basis of the 2030 Plan "will not be the case". The Abu Dhabi Department of Economic Development, Abu Dhabi Council for Economic Development and other agencies are co-ordinating the reassessment, a government spokesman said. Any changes would have to be approved by the Executive Council.
The vision, developed during the regional boom and released in November 2008, is the blueprint for the emirate's long-term effort to diversify away from oil, which accounted for about half of Abu Dhabi's Dh546.5bn nominal GDP last year. Government spending has shown no signs of slowing. Stripping out one-off expenditures last year - $10bn in aid to Dubai and Dh16bn in capital injections for Abu Dhabi's largest banks - the Government is planning to spend more money this year than last.
The resulting budget gaps are being filled by savings from previous years. The emirate's budget deficit was about $30bn last year and a further shortfall of $23.1bn is projected this year, assuming an oil price of $60 a barrel. With average oil prices in 2010 exceeding $70 a barrel, however, the deficit may prove to be smaller. Abu Dhabi has hired consultants to advise on the pace of infrastructure and development spending, which could slow to match market conditions, the Waha prospectus says. The emirate has also formed a debt-management office and in April to created a department to co-ordinate budget policy.
"The report demonstrates that Abu Dhabi is not immune from spending constraints resulting from the impact of the global downturn," said Tim Fox, the chief economist at Emirates NBD, the UAE's largest bank. "The main difference between it and many other countries, however, is that these are clearly cyclical deficits which should prove to be temporary in nature, and with average oil price for the year already well above the budgeted rate the likelihood is that they won't last for very long."
Unlike many other states running budget deficits, however, Abu Dhabi can cover deficits without borrowing. And the emirate has little direct government debt - about $4.4bn, according to the prospectus, or about 3 per cent of last year's GDP. Debt at government-owned companies was $22.1bn at the end of April, the prospectus added. "All of the countries in the region have large reserves that they can draw down to finance these deficits," said Paul Gamble, an economist at Jadwa Investment in Saudi Arabia, which ran a 45bn riyal (Dh44.07bn) deficit last year.
"The private sector was badly impacted by the global financial crisis and the dramatic slowdown in lending, so the government has taken over. It's a fairly sensible thing to do." To a certain extent, economists note, Abu Dhabi's commitment to spending despite the downturn could work in its favour. Competition is fierce among contractors for the emirate's development work, sending prices lower. The Government is already exploiting the trend. The Abu Dhabi National Oil Company (ADNOC), for example, had planned to spend $40bn on oil infrastructure between last year and 2014.
But ADNOC is now "reviewing a number of these projects in light of the current economic environment and the decline in construction costs to exploit market opportunities and reduce funding costs where possible", the prospectus says. More broadly it says: "The economic slowdown has resulted in increased competition among contractors and generally lower construction costs, which the government believes will help it to complete its infrastructure developments in a more cost-effective manner."