UAE non-oil GDP to grow 3.3%

The UAE’s non-oil economy grew by around 2.1 per cent in 20101 and is projected to rebound by nearly 3.3 per cent in 2011 because of higher oil prices and expansion in some sectors in Dubai, the IMF has said.

In a statement concluding its fourth consultation with UAE authorities released this week, the International Monetary Fund said the country’s GDP, the second largest in the Arab region after Saudi Arabia, is gaining ground, benefiting from strong crude prices, low interest rates and improved growth prospects in Asia.

But the report stressed the UAE needs to take measures to increase its economic resilience in face of any shocks in the future.

Its figures showed the UAE’s real GDP sharply rebounded by around 3.2 per cent in 2010 following a contraction in the previous year as a result of a sharp rise in crude prices.

"The momentum is carrying into 2011 with non-oil GDP growth projected to accelerate from 2.1 per cent in 2010 to 3.3 per cent, reflecting strong tourism, logistics, and trade in Dubai; and large public investment spending in Abu Dhabi, including through GREs," the report said.

"Higher oil prices are contributing to a marked improvement in the fiscal position and balance of payments. The successful restructuring of DW’s debt has improved market confidence, allowing top-grade Dubai issuers to regain market access."

The Washington-based IMF urged the UAE, a key OPEC oil producer, to strengthen the economy’s "resilience to shocks in the future."

It said the recent episode of debt restructuring in Dubai and the ramp-up of GRE borrowings in other emirates underline the need to identify, assess, and mitigate the risks posed by these entities.

"The recent boom-bust experience. highlights the challenge of macroeconomic management over the cycle. Given the pegged exchange rate regime, this requires mutually-supportive countercyclical fiscal and macro-prudential policies. Underpinning these reforms is the need to improve statistical capacity to inform policy decisions and disclosure.

The report said it believed a fragile recovery is gaining strength in the UAE, benefiting from a favorable global environment, including high oil prices, improved growth prospects in Asia, and low interest rate.

"Real GDP is projected to continue to grow at 3.3 per cent in 2011. Driven by higher food prices, consumer price inflation is expected to rise, but will remain moderate at 4.5 per cent in 2011, as rents continue to decline."

The IMF said its analysis of the real exchange rate in the UAE suggests that the dirham is in line with fundamentals. According to the report, the economic recovery in the UAE remains fragile because of some factors, including UN sanctions on Iran, a key trading partner of the Emirates.

"Furthermore, the unfolding turmoil in the region poses downside risks to the outlook. The re-pricing of risk in the region would result in more difficult market conditions," it said.

"On the positive side, there are indications that the UAE may benefit from increased tourism and investments looking for diversification within the region. Higher oil prices are also benefiting the UAE as a hydrocarbon exporter, though if sustained, they may dampen the recovery in view of lower demand from Asia."

The report said it believed the UAE’s macroeconomic policies should aim at supporting the recovery in 2011 and responding to the economic spillovers from the unfolding events in the region, if needed.

It said the government should also avoid contracting further its fiscal stance to ease economic recovery.

"With the reduction in communication fees, the federal government budget foresees a budget deficit in 2011. In contrast, to preserve fiscal sustainability and with the completion of some investment projects, Dubai is planning a fiscal consolidation," it said.

"While Abu Dhabi’s budget for 2011 is still not available, the mission concurs with the preliminary intentions of the government of Abu Dhabi to increase infrastructure spending, including through the GREs."

It urged the government to stand ready to expand spending on productive investment, in case the regional unrest starts affecting the economy.

It said the central bank should also monitor bank liquidity conditions and stand ready to relieve potential pressures.

"The re-pricing of risk in the region could trigger a sudden reversal of the recent deposit inflows to the banking sector. The central bank should monitor individual bank liquidity conditions to ensure that banks have the needed liquid assets to respond to such reversal."

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