The International Monetary Fund (IMF) has welcomed UAE’s efforts to unwind the large fiscal stimulus undertaken in response to the 2009 crisis as “appropriately focused.”
In a new comment on the UAE’s economy, executive directors at the IMF said the debt consolidation plans were on the right track, and that the gradual pace meant that the process was undergoing “without undermining the economic recovery”.
In addition, the comment said that IMF directors “particularly welcomed the consolidation plans in Dubai, which will help improve the emirate’s debt sustainability in the face of contingent liabilities related to government-related entities (GRE) and the still weak real estate market.”
These comments were made by the IMF in a media statement released after the conclusion of 2012 Article IV consultation with the UAE.
“The recovery of the economy is continuing despite the uncertain global economic environment. High oil prices and increased production, strong growth in Asia, and the UAE’s perceived safe haven status in the context of the regional turmoil contributed to an estimated real GDP growth of 4.9 per cent in 2011,” the IMF said.
The Fund noted that a recovery in the country’s real estate sector remains lagging, but added that other non-oil sectors such as trade, tourism and logistics picked up. “Despite the continued weakness of the construction and real estate sectors in the wake of the 2009 crisis, real non-hydrocarbon growth picked up to an estimated 2.7 per cent last year, supported by trade, logistics, and tourism,” it noted.
“For 2012, oil production is projected to be flat, whereas non-oil growth is expected to strengthen further to 3.5 per cent. Inflation remained low at 0.9 per cent in 2011, mainly due to a continuing decline in housing rents, and price pressures are expected to remain subdued this year,” the IMF added.
The IMF also noted that the completion of the Dubai World debt restructuring was a positive factor for UAE’s economic stability, but estimated that about $30 billion in GRE debt will be maturing this year, with significant amount of debt falling due in 2014-15.
“Directors noted the progress made in restructuring and managing the debt of GREs, but stressed the need for further efforts to mitigate the fiscal risks posed by these entities. They cautioned that GREs are still faced with high refinancing needs and are reliant on foreign funding. In this context, directors encouraged further deleveraging and strengthening of impaired GRE balance sheets, increased transparency, and improvements in corporate governance at GREs.”
The Fund also pointed out the low levels of private sector lending. “Despite the accommodative monetary stance under the peg to the US dollar, lending to the private sector has remained sluggish as excess capacity in the real estate sector and the debt overhang still limit lending opportunities,” it said in the report.
But it noted that banks in the country had emerged relatively stable despite a rise in non-performing loans. “The banking sector has remained well-capitalized and profitable, despite a continued rise in non-performing loans and higher provisioning,” it said.
“Directors took note of the resilience of the banking sector grounded on ample liquidity and capital buffers. They nonetheless encouraged the authorities to continue monitoring closely the financial situation of individual banks and their ability to cope with adverse shocks. Directors emphasized the importance of shielding the banking system from taking further GRE-related risks, including by avoiding channeling bank funding to non-viable GREs,” the report stated.
“In this regard, they welcomed the recent introduction of aggregate lending limits to GREs. Directors also suggested further strengthening the governance framework for the financial sector. Looking forward, they encouraged the development of domestic debt markets, which would among other things support banks’ liquidity management in preparation for the introduction of the Basel III liquidity framework.”
The IMF’s executive directors welcomed the continued economic recovery and favorable near-term outlook, but noted downside risks from the uncertain global environment and regional geopolitical tensions. “Going forward, directors encouraged the authorities to continue their efforts to sustain growth and diversify the economy, while maintaining macroeconomic and financial stability.”
Directors agreed that a continued accommodative monetary stance under the peg to the US dollar would counteract fiscal tightening and support the economic recovery. They took note of the staff assessment that the exchange rate has remained broadly aligned with fundamentals, and agreed that the exchange rate peg continues to serve as an effective nominal anchor for the economy.