Non-oil GDP to grow 3.25% in 2011

The UAE’s economic recovery is gaining strength, with the country’s non-oil GDP growth expected to accelerate from 2 per cent last year to 3.25 per cent this year on the back of an estimated strong performance by Dubai’s tourism, logistics and trade sectors, and increased public spending by Abu Dhabi, according to the International Monetary Fund (IMF).

“The economic recovery is gaining strength, supported by a favourable global environment but subject to increased regional uncertainty,” the IMF said in a statement on the UAE yesterday.

“While overall growth is expected to remain unchanged in 2011 at 3.25 per cent, non-oil GDP growth is projected to accelerate from 2 per cent in 2010 to 3.25 per cent in 2011, reflecting strong tourism, logistics, and trade in Dubai; and large public investment spending in Abu Dhabi, including through Government-Related Enterprises (GREs),” it said in the statement.

The IMF commended the UAE government for steps to make economic growth inclusive by creating more jobs for the nationals as well as upgrading infrastructure across the country. “The government’s plan to upgrade the infrastructure in the northern Emirates is a step towards more inclusive economic development,” the statement said.

The IMF also advised replacing water and electricity subsidies for all with cash handouts to the needy. “Replacing the current subsidies on water and electricity with explicit cash transfers to lower-income households should also be considered,” it said.

“The government intends to launch active labour-market policies to create jobs for nationals. Given the concentration of unemployment in the northern Emirates, launching these programs in these regions, while also relocating some of the government agencies/entities in the north, would be important,” it noted.
At the same time, IMF said the country’s banking sector is resilient to shocks owing to a high capital base and earnings that remained strong, but cautioned that non-performing loans (NPLs) had doubled since the beginning of the global financial crisis.

“The banking sector remains resilient to shocks, thanks to high capital – including from the government – and strong earnings, although non-performing loans have doubled since the crisis. The Central Bank has made important progress in strengthening its financial stability analysis, revamping the regulatory framework, and developing macroprudential policies,” it said.

“It should continue to ensure that banks provision adequately, particularly in light of increasing provisioning needs on Dubai GREs. It also needs to monitor the performance of restructured loans and encourage banks to retain more earnings to handle potential risks in the medium term.”

The global agency added that inflation, a key concern in emerging markets due to rising global food prices, remained well under control in the UAE thanks to declining rents that are supporting household budgets in the face of rising commodity prices. “Despite higher international food prices, CPI inflation is expected to remain moderate at 4 per cent, as rents continue to decline. Higher oil prices are contributing to a marked improvement in the fiscal position and balance of payments,” the IMF statement said.

While outlining the challenges that remain to the fragile recovery, the IMF statement mentioned geopolitical tensions and an excess supply of real estate.

“Risks to the recovery remain, including from possible economic spillovers of regional events. For example, the current re-pricing of political and sovereign risks in the region could lead to more challenging market conditions, which may put pressure on the corporate sector, including the GREs. The excess supply of property in Dubai and the uncertainty regarding its size will continue to weigh on growth,” it said.

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