Transcript of a Press Briefing on the 2009 Article IV Consultation with the United Arab Emirates

By Masood Ahmed, Director of the International Monetary Fund’s Middle East and Central Asia Department
Washington, D.C.
Wednesday, February 16, 2010

MS. STANKOVA: Good morning, everybody. Welcome to the conference call. Let me remind you that the content of the call and the UAE public information notice are under embargo until the conclusion of the call. With that I will pass the microphone to Masood Ahmed, Director of the Middle East and Central Asia department who will make a brief presentation on the main conclusions of the public information notice.

MR. AHMED: Thank you, Olga. Good morning to all of you or good afternoon depending on where you are. I am Masood Ahmed and I am the Director of the Middle East and Central Asia Department at the IMF. As Olga mentioned, we are releasing today the public information notice which is a summary of the discussions of the IMF Executive Board earlier this month on the annual Article IV Consultation for the UAE. We will also be releasing later today the actual full report, but we thought it would be useful given the interest to give you an opportunity to ask any questions on the public information notice.

What I thought I might do to start is to help by perhaps walking you through a little bit the main points that were discussed in the Board that covered the content of the IMF's staff report. There are four points that I want to particularly draw your attention to.

The first relates to the assessment by the staff and by the Executive Board of the growth prospects for the UAE. Here the main point is that after a small contraction in 2009, what we anticipate is that over all GDP growth for the UAE is likely to recover and be slightly short of 1 percent in 2010. We see this recovery coming about mainly through an increase in the hydrocarbon part of GDP which we expect to grow at about 3 percent this year. As for the nonhydrocarbon part of the GDP in the UAE we anticipate that this will remain about flat in 2010. Of course, the UAE is a component of a number of emirates so we expect that this flat nonhydrocarbon growth overall will comprise again a small decline or a small contraction in economic activity in Dubai, about 1 percent or so, and growth of course on the nonhydrocarbon in Abu Dhabi, but slower growth than in 2009 because the government has indicated -- the -- have indicated that they are likely to scale back their fiscal stimulus.

I should also say to you that looking beyond 2010 the IMF view of the medium-term prospects for the UAE economy are that these remain very favorable given the underlying strength and we do anticipate a return in the medium term to a more balanced a sustainable growth, probably not the levels of growth that we've seen in the last few years in the nonhydrocarbon sector, but certainly healthy growth. That's if you like the first area or the first point.

The second point I want to draw your attention to relates to the question from the restructuring process which is now underway with regard to the debt of Dubai World. Here the message from the IMF in this area is really threefold. The first point of this is to welcome the process that has been initiated, but at the same time we do stress that the importance of this processing being speedy, orderly, cooperative and predictable. We think that's an important dimension to achieving outcome in this regard. We also recognize 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 recognize that the process of operational restructuring is one that is likely to take more time. The second part of this message that I want to stress also is that going beyond the immediate issue of restructuring both for this immediate process and looking beyond, we do think that the government-related enterprises will benefit from increased transparency of economic and financial data including financial accounts and business strategies. In essence, this is simply a reflection of the fact that up to now a lot of these enterprises have been able to attract funding on the function of some sort of implicit guarantees. It is now clear that they will need to attract funding on the basis of their own financial and operating prospects and for that reason we do believe that more disclosure of financial data will be important to informing creditworthiness and stimulating access of the viable GREs to capital markets.

The third point that I want to draw your attention to which is also covered in the public information notice relates to the financial sector. The main message here is that the Executive Directors of the IMF welcome the steps that have been taken by the authorities to strengthen the banking system and to strengthen confidence in the banking system. They recognize that the Dubai World event has highlighted the importance of strong regulation and forward-looking supervision and in that context we have taken note and welcome the measures that the authorities are considering to strengthen the regulatory framework, for example, by enforcing uniform loan classification and provisioning and building up or capital buffers as well as macroprudential policies that could help limit downside risk, for example, countercyclical solvency and liquidity measures and simultaneous cross-bank examinations of specific risks.

The final area that I want to draw your attention in a point that was covered is the recognition that policy coordination among the different emirates at the federal level is becoming more critical and there have been some welcomed recent initiatives, for example, the establishment of a Fiscal Coordination Committee, the development of a multiyear expenditure plan, the introduction of debt-management units and the adoption of the national statistics law. We believe these are initiatives that will foster this coordination and we do think there is still room to further rationalize investment decisions at the federal level and to strengthen coordination of fiscal and debt-management policies.

Those were if you like the overall messages. I think that our basic point looking forward is that after a difficult year in 2009, a difficult year for the world, a difficult year for the UAE when it was affected by a series of shocks, the global economic slowdown, the shutdown of capital markets, the fallout from the bursting of the Dubai property bubble, and related to that the impact of the announcement on the (inaudible) of some of the debt, that after these difficulties looking forward, the external environment will be a little better for the UAE in the coming year. Oil prices are likely to be higher, global growth is certainly improving over last year which has an impact on the trade and services side, and 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 capitalize on the strength of the economy of the UAE and draw lessons from the difficulties over the last year.

Let me end with that. As we said, we'll be happy to take any questions of clarification that you have.

QUESTIONER: Mr. Ahmed, how are you? Thank you so much for hosting this conference call. My question is one thing I didn't quite get clearly is you forecast negative 1 percent growth for Dubai this year overall and not just entire real GDP growth, and what was it last year?

MR. AHMED: Just so we get the numbers clear on this and our goal for them, and if people still have a lack of clarity, do please come back so that we can make sure that we have the same numbers.

Let me first of all give you the numbers for 2009 and then I'll give you the numbers for 2010. When I give you the numbers for 2009, I'm going to give you the numbers for Abu Dhabi, for Dubai and the Northern Emirates and the UAE as a whole, and I'm going to give you these numbers both for total GDP growth and break them down by hydrocarbon and nonhydrocarbon. You're going to have as a result nine numbers for 2009, and just to make sure if there is any ambiguity, please come back to us and later on I'll ask Olga to also email them to you so that there is no chance of getting the numbers wrong.

First, back to 2009 for the UAE as a whole, our estimate of total growth last year was minus 0.7. This is comprised of the hydrocarbon part of GDP contracting by 6.3 percent and it was minus 6.3, and nonhydrocarbon growing by 1 percent. The combination of the two, minus 6.3 plus 1, resulted in an aggregate UAE total growth rate of minus 0.7.

When you look at this for Abu Dhabi and for Dubai separately, the same numbers first for Abu Dhabi are that the total GDP growth for Abu Dhabi was minus 0.1. Let's say essentially flat, but minus 0.1. This was largely driven by the hydrocarbon sector contracting minus 6.3 and the nonhydrocarbon sector expanding at 6.3 plus so that the same number minus and plus evened out to 0 minus 0.1. For Dubai and the Northern Emirates, of course there isn't much in the nature of hydrocarbons so their total real GDP growth rate for Dubai and the Northern Emirates in 2009 was minus 1.3 and that was the same as their growth of the nonhydrocarbon part of their economy because that's essentially what it was, minus 1.3 and nothing on the hydrocarbon sector. So that's 2009.

Now we'll do the same thing for 2010. For 2010, again starting with the UAE as a whole, our estimate for the total growth rate of the UAE is plus 0.6. Again within that we see the hydrocarbon part of the economy growing at 2.7 percent, the nonhydrocarbon part of the economy being flat with no growth in that.

The same thing now broken down first for Abu Dhabi includes total growth in Abu Dhabi we anticipate this coming year will be 2.9 percent, and when you break this down, the hydrocarbon part is 2.7 percent, nonhydrocarbon 3, all these numbers, 2.9 for the total for Abu Dhabi, 2.7 for hydrocarbon, 3 for nonhydrocarbon.

For Dubai and the Northern Emirates, we anticipate that in 2010 the total growth rate will be negative 1.3, the same as for last year, and within that we anticipate again no growth for hydrocarbon and a negative 1.4 for nonhydrocarbon. It's just a rounding issue there since there is no hydrocarbon in the economy, minus 1.4.

The basic story here is that the UAE as a whole switches from having negative growth, that is to say, a small contraction of about .7, to positive growth of between a half and 1 percent. I should say to you also that our numbers and our projections are neutral in a statistical sense which is to say that they could be higher as well as lower for the coming year. If you look at it, a lot of people have been focusing on downside risk, but perhaps it's worth saying that a couple of things could make the number higher. One is that the process of restructuring the debt obligations and dealing with the uncertainty in the real estate and construction sectors in Dubai could take faster than anticipated and that could put a floor on the contraction in Dubai. The second important thing that could drive a higher growth outcome is government spending and economic activity that results from it is higher in Abu Dhabi than we have anticipated.

We have reflected in our numbers an expectation that there will be some slowdown in the extent of government fiscal stimulus in Abu Dhabi, but of course if the fiscal stimulus were higher comparable more to what it was last year, that would drive the growth rate higher. The important thing about these numbers to remember is that there are a number of factors that could drive these numbers higher and lower, and the more important dimension of them is to look at the risks and the policy consequences rather than to look at these numbers with too much precision.

QUESTIONER: Dr. Ahmed, I have a question regarding some of your recommendations. We see that some of these have already been implemented or are being worked on such as tightening up provisioning rules in the banking system. I want to get your opinion on whether you see UAE officials moving on some of the other recommendations including transparency in governmental decision making. What is your impression of that?

MR. AHMED: I think what I would say on that, Mr. Namatalla, is that we have had a number of discussions with the UAE authorities in the process of writing this report and we discussed our recommendations with them. As you said, in some areas that process is already moving forward. As far as the specific issue of more transparency on government-related enterprises' financial situation, certainly our understanding is that people recognize among the UAE authorities that this is part of the process of ensuring that these enterprises are run on a commercial basis, that they attract financing based on their own strength and their own balance sheets, and in a way this is an evitable consequence of moving in the direction of ensuring that these enterprises are seen as commercial entities rather than as being implicitly guaranteed in one form and that's certainly the impression that we've got that there's a recognition of that and now there is a process with a number of people assisting in that to help translate that general direction into a more specific set of plans.

QUESTIONER: Hello everybody. I have a question for Dr. Ahmed. You said that the Abu Dhabi authorities indicated a plan to scale back the fiscal stimulus this year. Can you tell us whether they've indicated how large this cut is going to be? Thank you.

MR. AHMED: I don't think that it's so much a question of a cut. It's really more a sense I think in the discussions that 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 recognize that after a period of very intensive growth, while there was a continued need to provide a fiscal stimulus that it didn't have to be of the same magnitude of the previous year and particularly in the capital budget there is a sense that there was likely to be some degree of moderation in the stimulus so that I wouldn't characterize it as cutbacks but more as perhaps a slower pace of expansion in the fiscal plan.

QUESTIONER: Hello everyone. Mr. Ahmed, I want to ask you about the first solution, you are talking about the first solution or the Dubai World issue. What do you mean by the first solution? Would it include a haircut or not? Thank you.

MR. AHMED: I the precise terms that are used on that are that we believe that it's important that the process and solution be speedy, orderly, cooperative and predictable and that we believe that that approach would lead to a good outcome. The specific question that you're asking in terms of whether there would or would not be a haircut on the particular debt is something that is being negotiated between the creditors of Dubai World and the management of the companies. That's a process that is underway and it's not something on which we in the IMF take --

QUESTIONER: Hello, Dr. Ahmed. I wanted to clarify one thing. You said that Dubai and the Northern Emirates will post negative growth of 1.3 percent this year. Do you have a figure for Dubai by itself? The second question is, do you have any estimate for the total level of debt by Dubai? The government has said it's 80 billion. Is that a figure that you agree with?

MR. AHMED: On your first question, Henry, we don't have a separate breakdown of Dubai and the other Northern Emirates. Suffice it to say that a large part of the aggregate of Dubai and the Northern Emirates is actually Dubai so I don't think that there would be a huge difference between Dubai and Dubai and the Northern Emirates because the Dubai numbers would more or less dominate, but we don't actually have a very precise or a very disaggregated number beyond that to offer you.

As to the second question you raise about what is the total amount of debt that we have, I think in the staff report are numbers that we have been able to compile. For the UAE as a whole, the numbers that we have for debt is 132 billion which is the number that we've been able to pull together, external debt I'm talking about, which is about 57 percent of GDP. When it comes to the numbers for Dubai and particularly for Dubai Holdings or for Dubai Inc., we need to be careful because some of the numbers for debt that are there also include debt owed not externally but to local entities. With that caveat, the numbers that we have in the report for the total debt of Dubai Inc. is about 86 billion; 86 billion is the number that we have. I should say to you that we do recognize in the document that there are still some areas where further work on trying to establish the size and the nature of debt is worth doing. The numbers that we have are for publicly held debt in the form of bonds and syndicated loans and as such these numbers exclude bilateral bank loans and accounts payable, but they do include the debt owed to local debt holders. These are not strictly comparable numbers and it's hard therefore to compare two numbers easily, but there is a set of numbers in the staff report that are quite disaggregated including the expected repayment profile for those amounts coming due over the next 5 years and we've tried to put together the best set of numbers that we can but also recognize the caveats around them.

QUESTIONER: Often in the staff reports there is a forecast for 2011 as well and I was wondering if you could provide that.

MR. AHMED: Tom, I'm not sure that at this stage we have a 2011 forecast that is very disaggregated that I want to go into. I can perhaps give you the aggregate numbers in terms of growth rates for GDP if that's helpful for you. What we are anticipating, and perhaps I want to say not just 2011 but beyond 2011, as we said, 2009 was a difficult year with a small contraction, 2010, beginning of recovery, somewhat still held back by the need to deal with the still lingering consequences of the restructuring in the real estate and construction business in Dubai, but as we said, we do anticipate that once these issues are dealt with, then the economy of the UAE can begin to return to a healthier, more balanced and sustainable growth rate. The part of that growth rate that we do anticipate for 2011 goes up to about 3 percent, 2012 for about 4 percent, and thereafter it's about between 4-1/2 and 5 percent. That's roughly the part that we envisage which is the medium-term part. As we said earlier, 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 the demand for oil and the production of oil and 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.

MS. STANKOVA: Very well. If there are no further questions, let me state the time at which we conclude the conference call. Thank you very much.


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