Refinancing the debts of the United Arab Emirates' government-related entities (GREs) remains a challenge made more difficult as European banks trim their activities in the region, the International Monetary Fund said on Sunday.
State-owned companies in the UAE, one of the world's top five oil exporters, face $30 billion of maturing debt this year with over $68 billion more in 2013-2015, the IMF report said.
"Refinancing this large amount of maturing debt remains a challenge," the IMF said. "The GREs' high dependence on foreign funding increases the vulnerability to roll-over and financing risk, especially in the current volatile external financial environment."
The IMF held regular consultations with the UAE in March and February.
The global crisis burst Dubai's property bubble, triggering a $25 billion debt restructuring in its Dubai World conglomerate in 2009-2010, while other state firms were also hit.
Its oil-rich neighbour Abu Dhabi has also acted, rescuing its struggling developer Aldar Properties with nearly $10 billion.
As of March overall GRE debt stood at $185 billion, or 51 percent of the UAE's gross domestic product last year, compared with $182 billion, or 61 percent of 2010 GDP, at the end of 2010, with Abu Dhabi accounting for over 54 percent of the total, the IMF said.
"In response to the prospects that some European banks may not renew their credit, GREs are actively looking for alternative investors, particularly in Asia and the Gulf region," the IMF said.
It said the Abu Dhabi and Dubai authorities had noted that lessons have been learned from the crisis and that GREs have become more proactive in managing debt roll-overs with the latter emphasising that its firms were not backed by a sovereign guarantee.
The OPEC member's total gross public debt stands at $253 billion, or 70 percent of 2011 GDP, the report said.
The sustainability of Dubai's government debt has improved as the emirate, which has almost exhausted its $20 billion emergency funding, plans to nearly balance its fiscal accounts by 2014, the IMF said.
"Fiscal consolidation is key to reducing fiscal vulnerability, especially as GREs continue to pose fiscal risk to the sovereign," the IMF said.
However, a significant deterioration in the global economy could propel the Dubai government's debt-to-GDP ratio to 62 percent by 2017, compared to just 36 percent in the IMF baseline scenario.
"Dubai's debt could become unsustainable if the economy is hit by severe shocks," it said.
The Fund also said that shielding the UAE banking system from further GRE risks was key as the net exposure of lenders to government and public institutions increased by 3.5 percent of GDP, or 2.6 percent of banking system assets, in 2011.
"The authorities agreed that there is a risk that GREs will increasingly turn to domestic banks for their funding needs in case they face difficulties in external financing, and agreed with staff that it will be important to avoid channelling bank funding to non-viable GREs," the report said.
In April, the UAE central bank introduced new caps for bank loans made to local governments and their entities in the first such change in nearly two decades, which the IMF said would help contain banks' risks from GREs.
The ratio of non-performing loans of national banks stood at 6.2 percent in 2011, a sharp increase from 2008 pre-crisis levels, while that of Dubai banks was higher at 10.6 percent.
"This ratio could further increase by about 5 percentage points this year as a result of the ongoing restructuring of Dubai Holding, the potential restructuring of other maturing GRE debt, repeated rescheduling of loans, and continued stress of real estate companies," the IMF said.
The Fund's stress tests showed that the domestic banking system could absorb a significant increase in non-performing loans, though individual banks could be affected.