UAE economy is gaining pace: IMF

The UAE real GDP is projected to rebound by around 3.3 per cent in 2011 as the domestic economy continues go gain pace on the back of high public spending and recovery in Dubai, the International Monetary Fund has said.

Growth will be in both oil and non-oil sectors while strong oil prices will support economic expansion and surpluses in the country’s budget and current account, the Washington-based IMF said in statement on Monday.

Concluding its Article IV consultation with the UAE in late April, the IMF said debt restructuring by Dubai World (DW) had improved market confidence and allowed issuers in the emirate to regain market access.

“The economic recovery in the UAE is gaining strength, supported by a favourable global environment but subject to increased regional uncertainty….real non-hydrocarbon GDP growth is projected to accelerate to 3.3 per cent in 2011 from 2.1 per cent in 2010, reflecting stronger tourism, logistics, and trade in the emirate of Dubai; and large public investment spending in the emirate of Abu Dhabi, including through Government-Related Entities (GREs),” it said.

“Higher oil prices are also contributing to a marked improvement in the fiscal and external positions.”

It said that despite higher international food prices, inflation is expected to remain moderate at 4.5 per cent, as property rents continue to decline.

The IMF that DW debt restructuring was completed, but that other GREs entered in restructuring negotiations.

“Nevertheless, the successful restructuring of DW’s debt improved market confidence, allowing top-grade Dubai issuers to regain market access.”

In concluding the 2011 Article IV consultation, the IMF executive directors found that the UAE economy, the second largest in the Arab world after Saudi Arabia, is recovering, the report said. Benefiting from high oil prices and strong demand from traditional trading partners, non-hydrocarbon GDP growth is projected to accelerate from 2.1 per cent in 2010 to 3.3 per cent in 2011, it added.

It forecast overall GDP growth at around 3.3 per cent in 2011 compared with 3.2 per cent in 2010 and a 3.2 per cent contraction in 2009.

The report projected real oil GDP at 3.4 per cent compared with 5.3 per cent in 2010 and a downturn of 9.6 per cent in 2009.

In current prices, the UAE economy is expected to jump by nearly 20 per cent to Dh1,336 billion from nearly Dh1,109 billion, the IMF said.

“In light of the still fragile recovery, short-term policies should focus on supporting domestic demand, and adjust to the economic spillovers from the unfolding regional events. An overall neutral fiscal policy stance following last year’s fiscal contraction would support the economic recovery, while Dubai should consolidate,” the report said.

“To ensure efficiency of spending, the government should undertake cost-benefit analyses and implement the projects that have high economic return. While the central bank will maintain its accommodative monetary policy stance, it should also stand ready to provide liquidity to the market in case the re-pricing of risk in the region triggers a reversal of the recent deposit inflows to the banking sector.”

The IMF executive directors found that the UAE government’s response to the unfolding events in the region was appropriate. They also advised the authorities to consider replacing the subsidies on water and electricity with explicit cash transfers to lower-income households.

The IMF urged the central bank to continue to prepare the banking system for further possible deterioration in asset quality and future risks.

It said the central bank has taken a number of steps that would help improve the resilience of the banking sector to future shocks.

“Given the likelihood of further increase in NPLs, the central bank should continue to ensure that banks provision adequately, while monitoring the performance of restructured loans. Higher capital charges on risky GREs, and continued retained earnings by banks would also limit the potential financial risks posed by the GREs.”

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