Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

United Arab Emirates—2014 Article IV Consultation Concluding Statement of the IMF Mission

May 27, 2014

An International Monetary Fund (IMF) mission visited the United Arab Emirates from April 23 to May 8, 2014, to hold discussions for the 2014 Article IV consultation.1 Against the backdrop of a strengthening economic recovery, discussions focused on pursuing appropriate macroeconomic policies, mitigating potential risks from real estate and Government-Related Entities (GRE), and pursuing policies to further strengthen financial sector stability. The mission would like to thank the authorities for the open and fruitful discussions and for their hospitality.
Recent Developments

1. The economic recovery has been solid, supported by tourism, hospitality, and a rebounding real estate sector. While growth in oil production moderated in 2013, ongoing public projects in Abu Dhabi and buoyant growth in Dubai’s services sectors continued to underpin growth. With a strengthening economic cycle, also supported by the UAE’s perceived safe haven status amid regional instability, overall economic growth is estimated to have reached 5 percent in 2013. The current account surplus declined to 16 percent of GDP (from 18½ percent in 2012), reflecting buoyant imports. The real estate sector has been recovering at a fast pace in some segments, especially in the Dubai residential market, where prices increased on average by 30 percent year-on-year in March 2014.2 With this only gradually feeding into higher average rents, headline inflation increased to 1.9 percent year-on-year in March 2014 (from 1 percent a year ago).

2. Strong financial market performance also reflects this improved confidence. The stock indices have increased substantially (for example, the DFM rose 137 percent year-on-year in April 2014), and Dubai credit default swap spreads have further compressed.

3. The pace of fiscal consolidation slowed in 2013. The fiscal stance tightened by around 1 percent of non-hydrocarbon GDP, about half of what had been expected.3 While the Dubai government further reduced its deficit, slightly faster than planned, Abu Dhabi’s consolidation was less than budgeted, driven by higher security, defense, and other current spending. The overall fiscal surplus is estimated to have declined to 6.5 percent of GDP (from 8.9 percent of GDP in 2012), leading to an estimated increase in the fiscal break-even oil price to US$84, from US$78 in 2012.4

4. Amid ample liquidity in the banking system, private sector credit has begun to recover. Deposit growth has substantially strengthened, boosting liquidity in the banking system. Following years of credit-less recovery, lending to the private sector has begun to rebound (8.2 percent year-on-year growth in 2013, and further accelerating in the first quarter of 2014). Banks continued to increase their exposure to government and public enterprises, by AED15 billion (equivalent to 6 percent of bank capital) during 2013, in some cases further increasing their already substantial loan concentration. Non-performing loans have begun declining from their post-crisis peak but remain high especially among Dubai banks. The banking system remains amply capitalized (capital adequacy ratio of 18.5 percent as of March 2014), and stress tests conducted by the Central Bank of the UAE (CBU) show that the domestic banking system could absorb significant capital and liquidity shocks.

5. The economic recovery, combined with higher real estate prices and a liquid banking system, has further supported the GREs’ debt maturities. With the debt restructuring of Dubai Group ($10 billion) in January, reportedly at a large NPV haircut for creditors, the last major restructuring from the 2008/9 crisis has been completed. In addition, $20 billion in Dubai government debt to the CBU and Abu Dhabi falling due this year have been rolled over at reduced interest rates. Nakheel has begun prepaying bank debt due in 2015 and is in discussions with creditors about maturities on restructured debt. Dubai World has stepped up asset sales to raise cash and repay debt under its debt restructuring agreement, though some entities were sold to other Dubai GREs on undisclosed terms, and markets continue to monitor Dubai World’s capacity to repay forthcoming maturities. Financially healthy GREs have stepped up debt issuance. Abu Dhabi kept its total government and GRE debt contained.
Economic Outlook

6. The macroeconomic outlook is positive. Economic growth is expected to remain strong at about 4¾ percent in 2014 and 4½ percent in coming years. Growth will likely be driven by the nonhydrocarbon economy, which is expected to grow at around 5½ percent this year and beyond, supported by an improving global economic environment and strengthening domestic confidence associated with a rebounding real estate market, recently announced megaprojects, and the Expo 2020. By contrast, growth in hydrocarbon production will likely be limited in the context of an amply supplied global oil market. Inflation is expected to further increase, driven by higher rents. The current account is set to further decrease reflecting a projected moderate decline in hydrocarbon prices and continued import growth.

7. Domestic and external conditions pose risks to the largely favorable medium-term outlook.

• The strengthening real estate cycle, particularly in the Dubai residential market, could attract increased—and potentially destabilizing—speculative demand, spurring the risk of unsustainable price dynamics and an eventual correction. An acceleration of implementation of the Dubai megaprojects, currently planned to be flexible and in line with projected demand, could exacerbate this risk. Moreover, these megaprojects could create additional financial risks to Dubai’s still substantially indebted GREs: Dubai’s total government and GRE debt is estimated at $142 billion (141 percent of Dubai GDP)—of which $34 billion in government and government-guaranteed debt—with $92 billion falling due in 2014–19. With rent controls recently loosened, there is also a risk that rising real estate prices will feed more strongly into inflation.

• External downside risks also remain important. A sustained decline in oil prices, which could be triggered by deceleration of global demand or coming-on-stream of excess global supply capacity, would reduce export earnings and fiscal revenues. The UAE’s substantial foreign assets and fiscal surplus provide buffers against moderate or short-lived shocks. However, a large and prolonged fall in oil prices would reverse the accumulation of savings and ultimately result in lower fiscal spending. Renewed surges in global financial market volatility could trigger an increase in risk premiums and tighten liquidity conditions for the Dubai government and its GREs. By contrast, heightened geopolitical risks surrounding Russia and Ukraine or the Middle East could raise global energy prices and support the UAE’s external position, though a deeper deterioration could create significant disruptions in global financial and trade flows. Moreover, a permanent easing of international sanctions on Iran could benefit the UAE economy in light of the potential resumption of closer economic and financial linkages.
Pursuing Prudent Macroeconomic Policies

8. The combined federal and emirate budgets imply further fiscal consolidation this year. Continued fiscal consolidation is appropriate as it would undo earlier fiscal stimulus that is no longer needed amid a strengthening economic cycle and recovering private credit growth. It would also help reduce fiscal vulnerabilities (indicated by an increased break-even oil price), and bring the fiscal stance closer to levels needed to assure that an equitable amount of resources will be available for future generations. The federal budget is balanced and Dubai appropriately plans to continue on a path of gradual consolidation, further improving its debt sustainability. Abu Dhabi’s budget implies a large fiscal tightening (estimated at nearly 6 percent of non-oil GDP), including by reducing security, defense, and other current expenditures. As budget amendments in Abu Dhabi in the course of the year are likely to result in higher than initially budgeted spending, the mission projects a more moderate consolidation for 2014 but encourages the authorities to remain prudent throughout the year.

9. Medium-term fiscal plans are encouraging. The federal government has a balanced medium-term budget until 2016, and Dubai targets continued gradual consolidation in the coming years. Abu Dhabi’s informal medium-term fiscal framework also aims at consolidation. Further fiscal consolidation in the medium term will be appropriate as it would continue to correct for the UAE’s long-term intergenerational fiscal imbalance, reduce oil-price related risks, and, in the case of Dubai, address debt-related concerns. Looking ahead, strengthening Abu Dhabi’s budget process, to avoid frequent mid-year budget amendments, and formally adopting a medium-term fiscal plan would clarify the direction for fiscal policy for the emirate and the UAE as a whole. In addition, gradually reducing energy and water subsidies, while protecting those in need, would create fiscal space and improve energy efficiency. Limiting further increases in the wage bill would support the objectives of maintaining flexibility in the budget and gradually making private sector employment more attractive for nationals.

10. The longstanding exchange rate peg has served the UAE well. The UAE has benefited from the expansionary US monetary policy in the post-global-financial-crisis environment. Looking ahead, higher interest rates as a result of a normalization of US monetary policy, unless disruptive, would support the UAE in containing private credit growth as the economy is growing at a fast pace.
Managing Risks in Real Estate, GREs, and the Financial System

11. A continued focus on addressing potential risks stemming from the real estate market will be important. The situation in the real estate market is different from 2008 in that price increases partly still reflect a recovery from the post-crisis trough and demand today is significantly less bank-financed. Nonetheless, by some measures, nominal residential real estate prices in Dubai have already reached their 2008 peak levels. The fast pace of price increases could trigger an intensification of potentially destabilizing speculative demand and thus warrants close monitoring.

12. Further strengthening measures to discourage speculation would help mitigate the risk of a boom and bust cycle. The increase in Dubai’s real estate registration fee from 2 to 4 percent last October, along with regulatory measures to assure orderly market conditions for new real estate development, was a welcome step. Imposing additional fees and restrictions on reselling off-plan properties, as currently under consideration, would further discourage speculative demand. In addition, setting higher fees for reselling properties within a relatively short time would be useful. International experience shows that countries faced with real estate booms often repeatedly raised real estate fees and differentiated them by criteria such as the buyer’s residency, use of the property for occupancy or investment, or the time elapsed before reselling, with rates reaching up to around 30 percent for selected types of properties resold within a year (Singapore).

13. Recently imposed macroprudential regulations are supporting these efforts while helping to protect the soundness of the banking system. The new maximum loan-to-value ratios for mortgage lending and debt-service-to-income limits help provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market. Looking ahead, the CBU could consider further tightening these rules if price increases in the real estate market remain very large and if growth in real estate lending continues to increase. International experience shows that countries faced with real estate booms often repeatedly tightened macroprudential regulations such as loan-to-value limits, debt-service-to-income ratios, and risk weights for real estate lending.

14. Strengthening the coordinating mechanisms for prioritizing and sequencing major GRE projects will be important. A continued focus on avoiding new large-scale risk-taking by highly indebted GREs will help address their still vulnerable financial position. New megaprojects should continue to be executed in a gradual manner in line with expected demand, and it will be important to establish a top-down approach to coordination and oversight to ascertain this. Building on recent progress with partial early prepayment of debt maturities, it will be important to continue managing upcoming maturities proactively, including timely communication to continue guiding market expectations. Following increased transparency in the dissemination of some GREs’ financials, further improvements in the availability of information on Dubai GRE debt, including on the terms of asset transfers among GREs, and in risk management, reporting, and governance will facilitate deleveraging and strengthening of GRE balance sheets. In addition, GRE activities should be carefully planned in order not to crowd out private sector activity.

15. A continued focus on maintaining the health of the banking system will support financial stability. The recent pick-up in private credit growth amid ample liquidity in the banking system warrants close monitoring. Should credit growth accelerate significantly, tightening macroprudential regulations, such as tightening the advances-to-stable-resources ratio, capital adequacy ratio, risk weights for lending, or raising reserve requirements on time deposits, could be appropriate to preempt potentially excessive risk-taking. The recently introduced loan concentration limits for GREs and local governments will help contain risks to banks’ balance sheets in the context of the newly planned megaprojects. It will now be important to agree, as planned, on transition paths for banks that are currently not meeting the new limits, while avoiding any further build-up of exposures for these banks. In light of the high degree of interconnectedness between bank board members, who are also members of the boards of GREs and private sector enterprises, close adherence to best practices in corporate governance and risk management in the banking sector is needed to safeguard the independence of banks’ decision making. More broadly, ongoing monitoring and reporting of risks, including through the CBU’s financial stability reports, is important. Reviewing the responsibilities for financial sector regulation and supervision in the context of the planned financial services law will also be helpful.

16. The planned financial sector assessment will be a welcome opportunity to review the sector’s strengths and weaknesses. The mission believes that an assessment under the Financial Sector Assessment Program (FSAP) could play an important role in further strengthening the CBU as banking system regulator and supervisor, and other regulatory and supervisory agencies, while facilitating further financial sector development.

17. Given the open nature of the economy and its geographic location, continued focus on measures to mitigate risks stemming from money laundering is warranted. Increasing flows from abroad, channeled to the banking sector and financial market, real estate, gold market, and trade, create potential vulnerabilities. Continuing to strengthen the regime for anti-money laundering and combating the financing of terrorism (AML/CFT) is essential to mitigate these risks. Following the adoption of the 2002 AML law, the establishment of the AML suspicious cases unit in the CBU and its increasing engagement in international cooperation, amended AML legislation will come into force shortly. Once the legislative and regulatory framework is upgraded, efforts should focus on conducting a national risk assessment and strengthening the role of the supervisors of financial and non-financial businesses and professions, including real estate agents, to ensure that they adequately apply preventive measures including reporting of suspicious transactions commensurate with their risks. An AML/CFT assessment in the context of the FSAP would help define priority areas for further improvements.
Structural and Statistical Issues

18. Timely development of the local debt market would provide an alternative source of financing while supporting banks’ liquidity management. Developing the debt market would reduce the reliance of emirate governments, GREs and private companies on external funding and bank lending. It would also provide instruments for banks’ liquidity management under forthcoming Basel III liquidity rules. Passage of the draft Public Debt Law would allow the federal government to issue debt, while requiring the establishment of full Debt Management Offices in the emirates.

19. While significant improvements in the UAE’s statistical base are under way, important shortcomings remain. The Ministry of Finance compiles consolidated fiscal data for the federal and emirate governments, which constitutes important progress for assessing the UAE’s aggregate fiscal policy. With the help of IMF technical assistance, the National Bureau of Statistics (NBS), in cooperation with the CBU, ministries, and other agencies, has started a project to compile the International Investment Position, which will close an important statistical gap. With the implementation of an international transactions reporting system, improvements are also under way in the area of balance of payments statistics. It will be important to ascertain adequate staffing for balance of payments statistics to make this reform a success. The participation of the NBS in the recently inaugurated GCC-Stat is also an important step toward further improving the UAE’s statistical systems. Some significant data gaps remain: for example, there is still only limited data on Dubai GRE debt and potential contingent liabilities to the government, and demographic and labor market statistics remain very limited.

United Arab Emirates: Selected Macroeconomic Indicators, 2013–19
(Quota: SDR 752.5 million as of Feb. 2014)
(Population: 8.8 million, nationals: 1 million)
(Per capita GDP-2013: $43,876; poverty rate: n.a.; unemployment rate: 4.2% (2009))
(Poverty rate: n.a.)
  Prel. Proj. Proj. Proj. Proj. Proj. Proj.
  2013 2014 2015 2016 2017 2018 2019

Hydrocarbon sector


Exports of oil, oil products, and gas

(in billions of U.S. dollars)

123.0 122.5 120.0 116.5 114.6 114.1 114.3

Average crude oil export price (in U.S. dollar per barrel)

110.0 108.0 103.0 98.2 94.9 92.8 91.3

Crude oil production (in millions of barrels per day)

2.7 2.8 2.9 2.9 3.0 3.1 3.1
  (Annual percent change, unless otherwise indicated)

Output and prices


Nominal GDP (in billions of UAE dirhams)

1,478 1,550 1,622 1,693 1,791 1,918 2,069

Nominal GDP (in billions of U.S. dollars)

402 422 442 461 488 522 563

Real GDP

5.0 4.7 4.5 4.4 4.4 4.6 4.6

Real hydrocarbon GDP

4.0 3.0 2.3 2.1 1.8 1.8 1.8

Real nonhydrocarbon GDP

5.4 5.5 5.5 5.5 5.6 5.7 5.7

CPI inflation (average)

1.1 2.5 2.8 3.5 4.0 4.5 5.0
  (Percent of GDP, unless otherwise indicated)

Public finances



34.6 33.9 32.6 31.6 30.0 28.4 26.9


27.2 25.8 24.0 22.3 20.7 19.3 17.9


7.4 8.1 8.6 9.3 9.2 9.1 9.0

Expenditure and net lending

28.1 26.7 26.3 26.2 25.9 25.5 25.0


20.4 19.7 19.4 19.3 18.9 18.5 18.0


2.1 2.2 2.4 2.5 2.7 2.8 2.9

Net lending (loans and equity) 1/

4.2 4.2 4.1 4.0 3.9 3.8 3.7

Overall balance

6.5 7.2 6.3 5.3 4.0 2.9 1.9

Non-hydrocarbon primary balance
(excluding investment income) 1/

-36.5 -32.7 -30.4 -28.9 -27.2 -25.5 -24.0

Adjusted non-hydrocarbon primary balance
(excluding investment income) 2/ 3/

-34.2 -31.6 -29.8 -28.3 -26.7 -25.0 -23.4

Central government debt to banking system 4/

11.7 11.3 11.3 11.3 11.2 10.9 10.4
  (Annual percent change, unless otherwise indicated)

Monetary sector


Net foreign assets

52.6 46.2 25.3 14.4 13.5 14.8 12.0

Net domestic assets

15.6 16.5 13.8 10.3 7.6 6.8 8.1

Credit to private sector

10.3 15.3 15.2 14.0 11.1 10.7 10.3

Broad money

22.5 23.4 17.0 11.5 9.4 9.3 9.4
  (Billions of U.S. dollars, unless otherwise indicated)

External sector


Exports and re-exports of goods, of which:

379 402 433 467 508 562 630


123 123 120 116 115 114 114

Nonhydrocarbon, excluding re-exports

108 115 128 144 161 187 219

Imports of goods

242 274 301 336 377 430 492

Current account balance

64.7 51.3 52.1 50.1 42.8 35.6 31.8

Current account balance (in percent of GDP)

16.1 12.2 11.8 10.9 8.8 6.8 5.6

External debt (in percent of GDP) 5/

42.5 41.8 41.1 40.5 39.5 38.0 36.2

Gross official reserves 6/

68.1 79.8 94.5 114.2 136.0 162.6 187.7

In months of next year's imports of goods & services net of re-exports

4.2 4.5 4.9 5.4 5.6 5.9 6.0

Sources: UAE authorities; and IMF staff estimates.

1/ Includes loans for financing development projects.

2/ In percent of nonhydrocarbon GDP.

3/ Excludes DFSF related transactions for Dubai and grants to foreign governments.

5/ Foreign liabilities of the banking system only due to incomplete coverage of debt raised by non-banks in the international markets.

4/ Banking system claims only. Excludes debt raised by federal and Emirati governments in the international markets.

6/ Excludes foreign assets of sovereign wealth funds.

1 The mission, comprising Ms. Unigovskaya and Messrs. El Khoury, Finger (head), Irwin , Santos, and Shukurov, met with H.E. Governor of the Central Bank of United Arab Emirates Sultan Bin Nasser Al Suwaidi, H.E. Minister of State for Financial Affairs Obaid Humaid Al Tayer, H.E. Minister of Economy Sultan Bin Saeed Al Mansoori, the heads of economy and finance departments of the emirates, as well as other senior officials and representatives from the business and financial community.

2 Source: Dubai Land Department.

3 The fiscal stance is defined as the consolidated non-hydrocarbon primary balance for the federal, Abu Dhabi, Dubai and Sharjah budgets including loans and equity but excluding the investment income from the sovereign wealth funds and grants to foreign governments.

4 The break-even oil price is the oil price that would be needed to balance the consolidated budget of the federation and the emirates.


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