On June 26, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Arab Emirates.1
The United Arab Emirates has continued to benefit from its perceived safe-haven status amid regional instability. The economic recovery has been solid, supported by the tourism and hospitality sectors, and a rebounding real estate sector. While growth in oil production moderated, public projects in Abu Dhabi and buoyant growth in Dubai’s service sectors continued to underpin growth, which reached 5.2 percent in 2013. The real estate sector has been recovering quickly in some segments, especially in the Dubai residential market. As a result, headline inflation started to increase moderately. The current account and fiscal surpluses continue to be sizable owing to high hydrocarbon prices.
The macroeconomic outlook is positive. Economic growth is expected at 4.8 percent in 2014 and about 4.5 percent in coming years, supported by a number of megaprojects announced over the past 18 months and the successful bid for the World Expo 2020. Inflation is projected to further increase, driven by higher rents. The strengthening real estate cycle, particularly in the Dubai residential market, could attract increased speculative demand, creating the risk of unsustainable price dynamics and an eventual, potentially disruptive correction.
Dubai has made significant progress managing financial obligations from the 2008/9 crisis. The major debt restructurings from that crisis have been completed, and US$20 billion in Dubai government debt to the central bank and Abu Dhabi was rolled over at reduced interest rates. Nakheel has begun to prepay bank debt due in 2015. Dubai World has stepped up asset sales (sometimes to other government-related entities) to raise cash and repay debt under its debt restructuring agreement, though markets continue to monitor Dubai World’s capacity to make forthcoming repayments.
The banking system maintains significant liquidity and capital buffers, and nonperforming loans have begun declining from their post-crisis peak. Following years of credit-less recovery, lending to the private sector has begun to rebound amid accelerating deposit growth.
Executive Directors welcomed the solid economic growth and favorable outlook. They noted, however, potential risks from rapidly rising residential real estate prices and, more broadly, from the economy’s dependence on the global oil market, despite some recent progress in economic diversification. Directors took note of the UAE’s sizeable buffers that could be used in case of a shock.
Directors regarded the continued focus on prudent fiscal policy as appropriate. They particularly welcomed the continued gradual consolidation plans and bringing spending closer to levels that would allow saving an equitable share of oil wealth for future generations. They also noted that strengthening the budget process in Abu Dhabi would support better fiscal planning. Directors commended the authorities’ continued efforts to strengthen coordination of fiscal policies between the federal and emirate governments.
Directors agreed that the exchange rate peg has served the UAE well. In case of a pronounced acceleration in credit growth, Directors recommended tightening macroprudential regulations to limit excessive risk taking.
Directors emphasized the need for further policy action if real estate prices continue to increase rapidly. They welcomed the recent introduction of targeted macroprudential measures and the increase in Dubai’s real estate registration fee, and encouraged additional fees for reselling properties within a relatively short time to discourage speculative demand. Directors felt that these measures could be complemented by further tightening the recently introduced macroprudential policies if real estate lending increased more strongly.
Directors welcomed the recent progress in restructuring the debt of Dubai’s government-related entities (GREs), and stressed the need for continued strengthening of the GRE sector. They cautioned that continuous and close oversight of GREs will be essential to ascertain that projects are executed in line with expected demand, and to avoid further risk taking. In this context, Directors encouraged continued improvements in the transparency and governance of GREs and a continuation of the proactive management of upcoming debt repayments.
Directors took note of the ample liquidity and capital buffers in the banking sector, and encouraged the authorities to continue to focus on financial soundness on the back of a strong cyclical position and accelerating deposit growth. They welcomed the recently introduced loan concentration limits on GREs and emirate governments. Directors encouraged the development of domestic debt markets, which would support banks’ liquidity management in preparation for the introduction of the Basel III liquidity framework. They also encouraged the authorities to build on progress with developing the AML/CFT framework to mitigate potential risks.
Directors encouraged the authorities to continue to improve statistics by pressing ahead with their plan to compile the International Investment Position, providing adequate resources for improving the quality of balance-of-payments estimates, improving demographic and labor statistics, and disseminating complete data on Dubai GRE debt and potential contingent liabilities to the government.