IMF Executive Board Concludes 2009 Article IV Consultation with United Arab EmiratesPublic Information Notice (PIN) No. 10/20
February 17, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On February 3, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with United Arab Emirates.1
The United Arab Emirates (U.A.E.) was adversely affected by a series of external and domestic shocks in 2009, including the global economic slowdown, the shutdown of international capital markets, and the impact of the bursting Dubai property bubble in mid-2008. Oil receipts plummeted, global trade and logistics contracted, as did property/construction activities.
A second bout of disruption arose when Dubai World (DW) announced in late November 2009 that it would seek a debt standstill through May 2010, including on bonded debt owed by its Nakheel property subsidiary. Market tensions calmed down after DW paid off the Nakheel bond on time in December with financial support from Abu Dhabi, but uncertainties remain. In particular, discussions on the modalities of Dubai’s debt restructuring are still ongoing, access to financial markets by Dubai entities has become more difficult, and it will take some time for the Government of Dubai (GD) to design and implement a strategy on the operational restructuring of its government-related entities (GREs).
Overall real GDP is estimated to have contracted by about ½ percent in 2009. Hydrocarbon GDP declined by 6¼ percent, while nonhydrocarbon growth, which had averaged 8 percent in the three previous years, is estimated to have slowed to about 1 percent. This figure masks the diverging fortunes of Abu Dhabi (where growth was sustained by public sector investment spending) and the northern emirates (in particular Dubai and Sharjah), where economic activity dropped owing to the bursting property bubble and the contraction in world trade.
After peaking at about 12 percent in 2008, annual consumer inflation declined to about 1 percent in 2009, reflecting lower import prices and a reduction in rents arising from an increased supply of buildings as well as the renewal of contracts at deflated market prices.
The external current account balance is estimated to have shifted to a deficit of 2.7 percent of GDP in 2009, the first deficit in decades. As a result of OPEC-mandated production cuts and lower prices, hydrocarbon export revenues dropped by about 45 percent in 2009, while imports fell by 22 percent owing to a sharp contraction in consumer goods imports and despite the large public infrastructure projects in Abu Dhabi. The reopening of capital markets in the second quarter of 2009 and external borrowing particularly by Abu Dhabi entities helped stabilize the international reserves position by the end of 2009.
The consolidated fiscal position is estimated at a virtual balance in 2009, following a surplus of 21 percent of GDP in 2008. Both oil and non-oil revenues fell owing to the decline in oil prices and the slowdown in economic activity, while spending increased by about 14 percent—a continuation of the expansionary fiscal stance adopted in 2008. The nonhydrocarbon deficit widened by about 7 percentage points to 34 percent of non-oil GDP in 2009, owing mainly to higher outlays by Abu Dhabi on strategic projects.
Broad money growth slowed from 19 percent in 2008 to 10 percent in 2009. Real credit to the private sector was flat in 2009 as demand weakened and commercial banks adopted a much more cautious approach in response to the riskier conditions. Credit was redirected towards public sector enterprises, and banks increased their holding of central bank CDs.
As the global crisis intensified, the authorities implemented measures to maintain confidence in the banking system, including recapitalization. As a result, the capital adequacy ratio of national banks increased from 13 percent to 18 percent in half a year. The authorities are currently working on tightening the regulatory framework by introducing a general provision for unclassified loans, standardizing loan classification, and enforcing provisioning standards uniformly.
Executive Board Assessment
Executive Directors commended the U.A.E. authorities for their decisive response to shocks from the global financial crisis, lower oil prices, and the bursting of the Dubai bubble. Directors noted, however, that these shocks, together with the recent announcement that DW would seek a six-month debt standstill, have raised important challenges for the U.A.E. economy.
Directors agreed that the prospects for the U.A.E. economy, given its underlying strengths, remain favorable. It will be important, however, to embark on a more balanced and sustainable growth path over the medium term.
Directors welcomed the ongoing engagement with DW’s creditors and stressed the importance of a speedy, orderly, cooperative, 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. They also emphasized that debt restructuring should be accompanied by a vigorous effort to undertake an operational restructuring of GREs, including formulating exit strategies for nonviable corporations, a process that will likely take time.
Directors welcomed the steps taken by the authorities to strengthen confidence in the banking system, but noted that the DW event had highlighted the need for additional contingency planning measures. In this context, Directors stressed the need to articulate a plan for dealing with the potential increase in loan losses. They also emphasized 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 macroprudential 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. Directors also recommended an assessment of corporate governance, as well as development of a federal insolvency law.
Directors welcomed recent initiatives aimed at improving policy coordination at the federal level, including the establishment of a Fiscal Coordination Committee, the development of multi-year expenditure plans, and the introduction of debt management units. Looking ahead, they encouraged the authorities to rationalize investment decisions at the federal level, and to respond flexibly to the uncertainties surrounding the global outlook. Directors 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 exchange rate peg to the U.S. dollar has provided a credible anchor and contributed to macroeconomic stability.
Directors stressed the need for increased transparency of economic and financial data, including financial accounts and business strategies for GREs. Together with improved corporate governance, Directors concluded that these steps would contribute to facilitating access of viable GREs to capital markets.
Directors viewed the adoption of the Federal Statistics Law and the establishment of the National Bureau of Statistics as important steps toward developing capacity at the federal level. They stressed the need to develop an action plan including the issuance of implementing regulations and a strengthening of the Board’s operational independence. Directors also welcomed the authorities’ efforts to compile consolidated fiscal statistics and encouraged them to pursue plans to develop leading indicators and the U.A.E’s international investment position, in line with initiatives under the General Data Dissemination System.