Embark on sustainable growth: IMF
Taking stock of the IMF report on the UAE, a host of important indicators are pointing towards a substantial recovery in coming years.
The Washington-based Fund, which concluded its Article IV consultation with the UAE in early February, said post-crisis regulations by the Central Bank for local banks to expand their financial position pushed up the combined capital adequacy of national banks by five percentage points in just six months.
The IMF projected good economic prospects for the UAE and urged authorities to work for sustained growth in the domestic economy, the second largest in the Arab world after Saudi Arabia.
Speaking at a press conference in Washington after releasing the report, a senior IMF official said the UAE economy is poised for a big recovery in the coming years and disclosed that the country intends to “moderate” its stimulus plan.
“As the global crisis intensified, the authorities implemented measures to maintain confidence in the banking system, including recapitalisation. As a result, the capital adequacy ratio of national banks increased from 13 per cent to 18 per cent in half a year,” the IMF said in its five-page summary of the report.
“The authorities are currently working on tightening the regulatory framework by introducing a general provision for unclassified loans, standardising loan classification, and enforcing provisioning standards uniformly.”
The IMF did not specify the period during which the adequacy increased but Central Bank figures showed the combined capital adequacy of UAE banks soared from around 13.3 per cent at the end of 2008 to 17.6 per cent at the end of June 2009. It swelled to 18 per cent at the end of September last year and climbed to a record high of around 19.2 per cent at the end of 2009. The level is way above the Central Bank requirement for 11 per cent in June 2009 and 12 per cent in June 2010.
The Central Bank rules, described by bankers as among the toughest in the world, have triggered a drive by the country’s 24 national banks and 28 foreign units to increase their shareholders equity, involving capital and reserves.
The campaign has resulted in a sharp rise in their shareholders’ equity from around Dh153.6 billion at the end of 2008 to Dh212.4bn at the end of June and an all-time high of Dh231.4bn at the end of 2009.
Capital adequacy grew sharply despite a large increase in the banks’ collective assets from around Dh1,456bn at the end of 2008 to Dh1,489bn at the end of June last year and nearly Dh1,519bn at the end of 2009.
Praise for UAE
“(IMF) Executive Directors commended the UAE authorities for their decisive response to shocks from the global financial crisis and lower oil prices,” IMF said.
“Directors welcomed the steps taken by the authorities to strengthen confidence in the banking system, but noted that the Dubai World event had highlighted the need for additional contingency planning measures.”
The report said Directors stressed the need to articulate a plan for dealing with the potential increase in loan losses. They also emphasised the importance of pressing ahead with introducing general loan provisions, enforcing more uniform provisioning and loan classification standards, and further strengthening capital buffers.
“Directors agreed that macro-prudential policies should play an increasingly important role over the medium term, and noted that countercyclical solvency and liquidity measures, as well as closer monitoring of systemically important banks, could complement other regulatory policies,” the report said.
“Directors also recommended an assessment of corporate governance, as well as development of a federal insolvency law. They underscored that, given the limitations of monetary policy, fiscal policy should continue to play an important role in supporting economic activity. Most Directors agreed that the dirham’s exchange rate peg to the US dollar has provided a credible anchor and contributed to macroeconomic stability in the country.”
Turning to economy, the IMF said the UAE real GDP slipped by around 0.7 per cent in 2009, contradicting official estimates that there was slight growth.
Its figures showed the current account balance reverted to a deficit of around 2.7 per cent of GPD, the first deficit in decades.
The report showed that as a result of Opec-mandated production cuts and lower prices, hydrocarbon export revenues dived by about 45 per cent in 2009, while imports fell by 22 per cent owing to a sharp contraction in consumer goods imports and despite the large public infrastructure projects in Abu Dhabi.
It said the consolidated fiscal position, covering the federal budget and spending by each emirate, is estimated at a virtual balance in 2009, following a surplus of 21 per cent of GDP in 2008, when the UAE’s oil exports hit a record high.
In 2009, both oil and non-oil revenues declined because of a drop in prices and the slowdown in economic activity, while spending increased by about 14 per cent – a continuation of the expansionary fiscal stance adopted in 2008.
“Directors agreed that the prospects for the UAE economy, given its underlying strengths, remain favourable. It will be important, however, to embark on a more balanced and sustainable growth path over the medium term,” the IMF said.
“They welcomed the ongoing engagement with Dubai World’s creditors and stressed the importance of a speedy, orderly, co-operative, and predictable approach to debt restructuring. They underscored that the process should seek to enhance transparency and information disclosure and ensure comparability of treatment among creditors.”
IMF forecasts showed the UAE’s real GDP would grow by only around 0.6 per cent this year, far lower than official projections of 2.5-3 per cent.
Inflation was put below the official rate at only one per cent and is projected to edge up to about 1.5 per cent in 2010.
The report expected an improvement in crude prices this year to sharply boost the UAE’s hydrocarbon export revenues to nearly $71.8bn (Dh263.5bn) from around $56.8bn in 2009 against a record $102.7bn in 2008.
Total exports of goods were also forecast to swell to nearly $182.3bn from $163bn but imports could slip to $135.1bn from $137.2bn.
The figures showed the current account had a deficit of around $6.2bn in 2009 but is expected to rebound into a massive surplus of $18.1bn in 2010. Official reserves were put at $29.9bn at the end of 2009 and projected at $39.5bn at the end of 2010.
Commenting on the report, a senior IMF official reiterated that the medium outlook for the UAE economy is favourable as real GDP could swell by around three per cent in 2011 and four per cent in 2012.
Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, told reporters that the UAE had spoken of plans to “moderate” its counter-crisis fiscal stimulus programme but stressed this did not mean a reduction.
“I don’t think that it’s so much a question of a cut. It was in the discussions the team had with them when they were in Abu Dhabi late last year and then again at the beginning of this year that the Abu Dhabi authorities recognised that after a period of very intensive growth, while there was a continued need to provide a fiscal stimulus it didn’t have to be of the same magnitude of the previous year, particularly in the capital budget. There is a sense that there was likely to be some degree of moderation in the stimulus,” he told a news conference about the report on Friday.
“So that I wouldn’t characterise it as cutbacks but more as, perhaps, a slower pace of expansion in the fiscal plan,” said Ahmed.
Beginning of recovery
Ahmed echoed the IMF estimates that the UAE’s real GDP slipped slightly in 2009 but expected 2010 would be the beginning of recovery for the country.
“The part of that growth rate that we anticipate for 2011 goes up to about three per cent, 2012 about four per cent, and thereafter it is between 4.5 and five per cent. That is roughly the part that we envisage, which is the medium-term part,” he said.
“These are not quite the heady numbers of the last few years, but it is a healthy part. And again to say, as with all of these projections, a lot depends on what we assume in commodity-based economies about oil demand and the production of hydrocarbons so that it’s very much driven by the hydrocarbons number on the one side, and on the other side by the base at which economic activity outside the hydrocarbon sector can begin to recover and be sustained.”
He said that looking beyond 2010, the IMF view of the medium-term prospects for the UAE economy is that they remain very favourable given the underlying strength of UAE’s economy and the IMF does anticipate a return in the medium term to a more balanced and sustainable growth.
“These growth rates will probably not be the levels of growth that we have seen in the last few years in the non-hydrocarbon sector, but certainly healthy growth,” said Ahmed.
Turning to Dubai World debt, he said the IMF welcomed the process that was initiated, but at the same time “we do stress the importance of this processing being speedy, orderly, co-operative and predictable”.
“We think that is an important dimension to achieving outcome in this regard. We also recognise that it’s not just restructuring of the debt, it’s also a question of the operational restructuring of a number of government-related enterprises and we recognise that the process of operational restructuring is one that is likely to take more time.
“The second part of this message I want to stress is that going beyond the immediate issue of restructuring, both for this immediate process and looking beyond, we think the government-related enterprises will benefit from increased transparency of economic and financial data including financial accounts and business strategies.”
Ahmed said he expected the external environment to be a little better for the UAE in the coming year on the grounds higher oil prices as global growth, which has an impact on trade and services, had improved over the last year.
“This improved environment provides the opportunity and should facilitate dealing with the remaining issues related to the real estate and construction difficulties in part of the UAE and it should provide an opportunity to strengthen the policy framework and institutions that would then lay the basis for sustained and balanced growth for the emirates that capitalise on the strength of the economy of the UAE and draw lessons from the difficulties over the last year,” Ahmed said.
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