## _cr06257 ## Source details **Canonical URL:** [_cr06257](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06257.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06257.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06257.pdf.json) --- ### Executive Summary — Background and Recent Developments - Economic policy framework: - Outward-oriented development strategy and prudent financial policies led to large accumulation of external financial assets and impressive economic growth. - U.A.E. is a confederation of seven emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Ras al-Khaimah, Umm al-Qaiwain, and Fujairah) each with considerable autonomy. - Abu Dhabi’s prudent management of oil wealth and Dubai’s push for economic diversification underpin recent success. - Institutional and reform orientation: - Major emirates plan reforms to foster more private sector participation (examples: Dubai property law allowing 100 percent foreign ownership in pre-designated areas; Sharjah industrial free zones; Abu Dhabi utility privatization and a new medium-term development plan). - Fund policy advice focused on strengthening fiscal policy, modernizing financial sector legal framework, and improving capital markets supervision and regulations. - Data and monitoring constraints: - Numerous data shortcomings and limited improvements in economic and social statistics remain, imposing serious constraints on monitoring, analysis, and policy formulation. - Broad and proper information collection is needed given the rapid growth of capital markets and capital inflows. ### Aggregate Performance, Prices, and External Sector (2005) - Growth and prices: - Real GDP growth is estimated at 8.5 percent in 2005. - Real nonhydrocarbon GDP growth for 2004 revised to 12.6 percent from 10 percent; real nonhydrocarbon growth for 2005 estimated at 11 percent (authorities initially estimated 6.2 percent; since then revised upward to 10.8 percent). - Hydrocarbon GDP growth for 2005 estimated at 2.1 percent. - CPI: official preliminary estimates indicate CPI inflation at about 6 percent; staff estimates about 8 percent; market reports estimate CPI inflation in 2005 was above 15 percent; Executive Summary line—CPI estimated to have reached 8 percent in 2005. - External sector: - External current account surplus in 2005 about 14.5 percent of GDP (also reported as 14.7 percent of GDP in other tables). - Imports increased by 27 percent to about $81 billion in 2005. - FDI inflows estimated to have reached $11 billion in 2005. - Fiscal aggregates (2005): - Consolidated fiscal surplus of the federal government and the three largest emirates estimated at about 27 percent of GDP in 2005. ### Money, Credit, and Monetary Policy (2003–early 2006) - Broad money and credit: - Broad money growth remained strong at about 34 percent (2003–05 reference; Table 4). - Broad money (M2) change: 15.6 (2002), 16.1 (2003), 23.2 (2004), 33.8 (2005), 26.6 (2006). - Private sector credit growth 44.5 percent (2005 reference); private sector credit (end-period) AED 305,546 (2005), projected AED 395,666 (2006). - Most private credit categories rose significantly: loans to construction increased by 32 percent; personal loans increased by 93 percent. - At end-2005, direct credit to equity markets and mortgage loans accounted for about 40 percent of total personal loans. - Excluding direct credit to the equity market, broad money increased by 27 percent. - Early 2006 developments: - In first 2 months of 2006 following regional equity market decline: net foreign assets of banking system declined by about AED 30 billion; claims on private sector increased by 13 percent; broad money grew by 2.3 percent. - Monetary policy stance and constraints: - Fixed exchange rate system and full capital account convertibility limit effectiveness of monetary policy. - Recommended measures if credit growth remains strong: raise reserve requirements on demand deposits; introduce tighter prudential norms including margin lending, collateral valuation and provisioning; increase certain risk weights; consider lowering the percent individuals can borrow against salaries (current limit: individuals can borrow up to 40 percent of their salaries). - CBU successively hiked interest rates; three-month interbank rate increased from 2.4 percent end-2004 to 4.7 percent in 2005, and stood at 5.14 percent (textual note). ### Financial Sector Structure, Soundness, and Risks - Banking sector size and performance: - Banks’ balance sheet increased by 40 percent to AED 608.5 billion (about $166 billion). - Banks’ profits more than doubled to $5.1 billion in 2005. - Capital-assets ratio (CAR) remained high at 17.4 percent. - Stock of nonperforming loans (NPLs) increased by 2.4 percent in 2005; ratio of NPLs to total loans declined to 8.3 percent from 12.5 percent in 2004. - Provisions were considerable, bringing net NPLs ratio to total loans below 2 percent. - Non-interest income increased by over 112 percent and accounted for about one third of total banks’ income. - Exposures and concentration risks: - Lending to construction rose by 2 percentage points to 12 percent of total credit. - Direct lending to equity markets increased by 5 percentage points to 6 percent of total credit. - Some banks reportedly leveraged investments in excess of permitted bank margin lending ratio of 5 to 1. - Increased concentration of bank loans to a few large business groups is a key risk. - CBU single borrower limit considered appropriate; consideration to reduce limit on total large exposures currently set at 8 times the capital base; CBU needs to include off-balance-sheet items and interbank exposures with maturity less than 12 months in the definition of large exposures. - Macro-prudential indicators (selected): - Private sector credit (annual change): 8.8 (2001), 11.3 (2002), 13.5 (2003), 24.7 (2004), 44.5 (2005). - Return on assets: 1.9 (2001), 1.9 (2002), 1.9 (2003), 2.1 (2004), 2.7 (2005). - Return on equity: 15.5 (2001), 16.2 (2002), 16.8 (2003), 18.6 (2004), 23.0 (2005). ### Capital Markets: Expansion, Corrections, and Regulation - 2005 performance and correction: - DFM and ADSM indices gained 132 percent and 69 percent, respectively, in 2005. - U.A.E. led the region in market capitalization, market activities, and number of IPOs (11). - By end-April 2006: DFM declined by about 55 percent and ADSM by about 40 percent since peaks in November 2005. - Two IPOs issued in March 2006 were over-subscribed by 500 times and 165 times the shares offered; bids were $74 billion (about 60 percent of 2005 GDP) and $109 billion (about 85 percent of 2005 GDP); simultaneous IPOs attracted more than $180 billion from investors (compared to IPOs of $809 million), creating a liquidity crunch and triggering a DFM correction of almost 12 percent on March 14, 2006. - IPO pricing process and concerns: - Ministry of Economy (MOE) sets IPO prices at nominal value of shares rather than via market valuation; MOE sets prices for subsequent offerings usually at a substantial discount, contributing to underpricing, over-subscription, and volatility. - Regulatory and institutional progress: - Considerable progress on regulatory framework for the Dubai International Financial Center (DIFC); as of mid-February 2006, 160 companies and 40 financial institutions licensed in the free zone. - Actual volume of business in DIFC still relatively small. - Policy recommendations for capital markets and supervision: - Amend Company Law so subscription prices for new offerings are set by the market through professional underwriters based on company valuation; restrict intervention in pricing of subsequent offerings (limit on discount). - Replace multiple margin rates with a single rate per class of securities; staff recommends maximum loan value for most liquid traded stocks be set at 50 percent. - Define responsibilities of entities regulating capital markets; close regulatory gaps; give regulatory authorities clear powers to set and enforce prospectus requirements and corporate governance standards. - Increase size of public float of securities; increase institutional investor participation; introduce market stabilization mechanisms (market maker system, hedging instruments). - Improve collection and dissemination of statistics on non-bank financial intermediaries; conduct comprehensive assessment of capital markets regime against IOSCO standards; assess DIFC alongside rest of U.A.E. ### Macroeconomic Outlook and Medium-Term Baseline (2006–11) - Near term (2006): - Economic growth projected to remain buoyant in 2006; real nonhydrocarbon activity expected to remain high. - Recent equity market correction and rise in domestic interest rates expected to dampen domestic demand. - Stabilization of rental costs (Dubai has a 15 percent cap on rental increases until end-2006) and fading impact of the 2005 fuel price hike could balance inflationary pressures. - Medium term (2007–11) projections (selected): - Oil production projected to rise to 3.5 million barrels per day by 2011 (crude oil production: 2.72 (2005), 2.97 (2006), 3.07 (2007), 3.15 (2008), 3.22 (2009), 3.31 (2010), 3.46 (2011)). - Average U.A.E. oil export price (US$/barrel): 52.60 (2005), 67.25 (2006), 70.25 (2007), 68.75 (2008), 67.50 (2009), 66.25 (2010), 64.25 (2011). - Real nonhydrocarbon growth projected to settle at 6.5–7.0 percent during 2007–11 (table shows non-hydrocarbon percent: 11.0 (2005), 10.5 (2006), 6.6 (2007), 6.5 (2008), 6.4 (2009), 6.5 (2010), 6.4 (2011)). - Consumer prices (percent): 8.0 (2005), 7.7 (2006), 5.0 (2007), 4.7 (2008), 3.6 (2009), 3.7 (2010), 3.7 (2011). - Overall fiscal balance (In percent of GDP): 26.9 (2005), 29.7 (2006), 29.9 (2007), 28.9 (2008), 26.9 (2009), 26.2 (2010), 25.4 (2011). - Risks: - Downside risk from a drop in oil prices described as limited; staff estimates that for each $1 drop in the price of a barrel of oil, on average, the fiscal balance will weaken by about 0.5 percent of GDP during 2006–11. - Additional risks: asset price developments in equity and real estate markets and accelerating inflationary pressure. - Considerable supply of residential units expected by early 2007 could put downward pressure on real estate prices. ### Fiscal Policy, Public Spending, and Major Investment Plans - Fiscal stance and coordination: - Large increase in social and infrastructure expenditure envisaged by authorities is broadly appropriate provided balanced with underlying risks and absorptive capacity. - Need for better fiscal policy coordination among the emirates and the federal government; Ministry of Finance and Industry requested a Fund advisor to help set up a macro-fiscal unit. - Federal government moving toward budget classification consistent with 2001 Government Finance Statistics, single treasury account, and new accounting framework. - Revenue and subsidy reforms: - Revenue base could be broadened by introducing a VAT system at the federal level in the context of the GCC monetary union; federal authorities indicate implementation will await a GCC ministerial decision. - Need to reduce subsidies on water and electricity gradually and replace them by targeted payments to nationals below a certain income. - GPSSA needs major overhaul; actuarial study to be completed soon to inform reform strategy. - Expenditure and investment plans (announced estimates): - Planned development expenditures over next 5 years estimated at over $350 billion, a significant part to be shouldered by the private sector. - Total investment in Dubai over the medium-term conservatively estimated at $200 billion. - About $160 billion worth of projects planned for Abu Dhabi. - Abu Dhabi: a major $25 billion investment plan for upgrading upstream and downstream production capacity; oil production capacity planned to expand from 2.9 million barrels to 3.5 million barrels per day within the next five to seven years. - In 2006, federal government development expenditures projected to increase by ten fold on health and education and by 400 percent on public housing. - Examples of announced project values: - Dubai: Dubai International Airport expansion ($4 billion); Palm Jumeirah ($5 billion); Palm Jebel Ali ($7.5 billion); Palm Deira ($12.5 billion); Dubai light rail transport project ($3 billion); Jebel Ali Airport city ($20 billion); Dubai Land ($10 billion); Dubai Aerospace Enterprise ($15 billion); Emirates Pearl ($9.5 billion); utilities ($15 billion) and roads ($5 billion). - Abu Dhabi: new port ($2.5 billion), airport expansion ($5.7 billion), joint venture between DUBAL and Mubadala, and $25 billion upstream/downstream upgrade. ### Labor Market, FDI, and Structural Reforms - FDI and Company Law: - Broadening of FDI opportunities in Dubai free zones is welcome. - U.A.E. amending Commercial Company Law; ceiling on foreign ownership may be raised from current 49 percent; need to pass new Company Law with higher foreign ownership thresholds. - Wages, employment, and labor policy: - Average 20 percent increase in wages in 2005 noted; private sector believes wage increases may be exceeding productivity gains. - Most private sector jobs filled by expatriates; majority of nationals continue to seek public sector employment. - Authorities implemented measures to increase costs of hiring expatriate workers and quotas to increase employment of nationals. - New labor law expected to be passed by year-end grants workers rights to peacefully assemble and form trade unions. - Employment opportunities for nationals to be created through long-term structural policies in education, training, wage policy, and labor legislation. ### Data, Statistics, and Transparency — Weaknesses and Recommended Actions - Major weaknesses documented: - Structural weaknesses in data quality, coverage, periodicity, timeliness, and inter-sectoral consistency, particularly serious in the fiscal area. - Data compilation and reporting hampered by shortage of trained staff and poor coordination within and between the emirates and federal government agencies. - Many official statistics are produced only on an annual basis. - Specific data needs and actions: - Urgent need to improve collection, compilation, and reporting of fiscal, national accounts, balance of payments, and price statistics (monthly CPI). - Compile data on off-budget fiscal operations and on domestic and external debt at the emirate level. - Finalize the GDDS metadata and nominate a GDDS coordinator. - Population census completed and results to be published in 2006; household budget and business establishment surveys expected to be completed by end-2006. - Monetary and external data issues: - CBU changed banking data compilation mid-2001 then reverted in 2005 to residency principle; prior change introduced bias about AED 20 billion. - U.A.E. does not compile or publish the International Investment Position (IIP) statement; no data collected on FDI or private nonfinancial sector external assets and liabilities; BIS statistics indicate external liabilities relatively small. - Balance of payments compilation hampered by lack of primary data sources and insufficient staffing. ### Staff Appraisal: Principal Findings and Policy Recommendations - Primary objective: - Ensure economic expansion proceeds at a sustainable pace while maintaining macroeconomic stability. - Fiscal recommendations: - Large increase in social and infrastructure expenditure broadly appropriate if balanced with risk factors and absorptive capacity. - Improve fiscal policy coordination among emirates and federal government; link public sector wage increases increasingly to productivity. - Phase out subsidies on water and electricity and replace with targeted payments to nationals below a certain income. - Introduce legislation to reform the General Pension and Social Security System while running operational surpluses. - Start preparatory work for introduction of a VAT system at the federal level. - Monetary and prudential recommendations: - Monitor inflation, credit growth, and asset price developments; tighten financial policies if rapid private credit growth and inflationary pressures continue in 2006 (much of adjustment burden may fall on public spending due to monetary policy limitations). - Raise reserve requirements on demand deposits and introduce tighter prudential norms for banks and non-bank financial institutions (margin lending, collateral valuation, provisioning, risk weights). - Consider gradual lowering of percent individuals can borrow against salaries (current limit: 40 percent). - Financial sector and capital markets: - Define responsibilities of entities regulating capital markets; close regulatory gaps; ensure coordination among regulatory entities for comprehensive supervision. - Amend Company Law to have IPO subscription prices set by market through professional underwriters; limit MOE intervention in pricing; permit IPOs only for companies with audited balance sheets for at least two years. - Replace multiple margin rates with single rate per class of securities and set maximum loan value for most liquid traded stocks at 50 percent. - Increase public float, institutional investor participation, and introduce market stabilization mechanisms and hedging instruments. - Conduct comprehensive assessment of capital markets regime against IOSCO standards and assess DIFC legal regime alongside rest of U.A.E. - Data and transparency: - Address structural weaknesses in data urgently; build a comprehensive and consistent statistical system; compile debt data at emirate level. *Source: IMF staff report excerpts contained in the supplied PDF content unit.* ### Executive Summary ...................................................................................................... ### _cr06257 - Executive Summary ...................................................................................................... ### Background - Economic policy framework: - Outward-oriented development strategy and prudent financial policies led to large accumulation of external financial assets and impressive economic growth. - Abu Dhabi’s prudent management of oil wealth and Dubai’s push for economic diversification underpin recent success. - The U.A.E. is a confederation of seven emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Ras al-Khaimah, Umm al-Qaiwain, and Fujairah) each with considerable autonomy. - Recent institutional and reform orientation: - Major emirates plan reforms to foster more private sector participation (examples: Dubai property law allowing 100 percent foreign ownership in pre-designated areas; Sharjah industrial free zones; Abu Dhabi utility privatization and a new medium-term development plan). - Fund policy advice has focused on strengthening fiscal policy, modernizing financial sector legal framework, and improving capital markets supervision and regulations. - Data and monitoring constraints: - Numerous data shortcomings and limited improvements in economic and social statistics remain, imposing serious constraints on monitoring, analysis, and policy formulation. - Broad and proper information collection is needed given the rapid growth of capital markets and capital inflows. ### Recent Developments - Aggregate performance and prices: - Real GDP growth is estimated at 8.5 percent in 2005. - Real nonhydrocarbon GDP growth for 2004 was revised upward to 12.6 percent from 10 percent; for 2005 real nonhydrocarbon growth is estimated at 11 percent (authorities initially estimated 6.2 percent; since then revised upward to 10.8 percent). - Hydrocarbon GDP growth for 2005 is estimated at 2.1 percent. - Inflation: initial Executive Summary line—CPI estimated to have reached 8 percent in 2005; elsewhere official preliminary estimates indicate CPI inflation at about 6 percent, while staff estimates about 8 percent though this may be higher; recent market reports estimate CPI inflation in 2005 was above 15 percent. - Financial markets and monetary indicators: - Abundant liquidity and booming asset markets, with equity markets rising significantly since 2004 and peaking in November 2005, then experiencing a sharp correction. - Growth in money supply was 34 percent (2003–05 reference); petroleum prices rose 31 percent (same reference). - Banks’ profits increased substantially in 2005, driven by IPO and equity market activity and the booming real estate sector; capital adequacy ratios remained high and nonperforming loan ratios declined. - External sector: - Sharp rise in oil prices and strong nonhydrocarbon exports produced a large external current account surplus in 2005—about 14.5 percent of GDP. - Imports increased by 27 percent to about $81 billion in 2005. - FDI inflows are estimated to have reached $11 billion in 2005. - Fiscal sector and emirate-level developments: - Consolidated fiscal surplus of the federal government and the three largest emirates is estimated to have reached about 27 percent of GDP in 2005. - Abu Dhabi: budget improved markedly in 2005 due to high oil prices and moderate expenditure increases; expenditures grew by only 8 percent largely due to outsourcing; workforce reduced by about 8,000 workers (14.5 percent); despite salary increases of 25 percent for nationals and 15 percent for expatriates, the wage bill declined; Abu Dhabi contributed AED 6.2 billion to its pension fund from privatization receipts. - Dubai and Sharjah maintained largely balanced budgets, but Dubai’s budget does not provide a comprehensive picture due to continuing off-budget fiscal operations. - Federal government reforms: moves toward budget classification consistent with 2001 Government Finance Statistics, toward a single treasury account, and a new accounting framework; budget law improvements noted but judged insufficient to induce full use of performance budgeting. - Inflationary pressures and non-tradables: - Prices of non-tradable goods and services rose significantly; real estate prices reported to have increased significantly since 2004 (particularly in Dubai), though comprehensive data are not available. ### Medium-Term Context and Risks - Baseline drivers: - Outlook underpinned by expectations that world oil prices will remain high and oil production will increase steadily to 3.5 million barrels per day by 2011. - Key risks to outlook: - Downside risk from a drop in oil prices exists but is characterized as limited. - Risks warranting close monitoring include asset price developments in equity and real estate markets and accelerating inflationary pressures. - Planned large increase in public sector investment is expected to offset some domestic demand slowdown from equity corrections and rising domestic interest rates. ### Staff Appraisal: Findings and Policy Recommendations - Primary objective: - Ensure economic expansion proceeds at a sustainable pace while maintaining macroeconomic stability. - Fiscal policy and public spending: - The large increase in social and infrastructure expenditure envisaged by the authorities is broadly appropriate provided it is balanced with underlying risk factors. - Comfortable fiscal position and significant accumulation of financial assets argue for higher infrastructure and social spending to broaden growth and increase absorptive capacity. - If rapid private sector credit growth and consequent inflationary pressures continue in 2006, tightening financial policies will be necessary, including reassessing public expenditure plans. - Need for better fiscal policy coordination among the emirates and the federal government. - Wage increases in the public sector should be increasingly linked to productivity. - Revenue base could be broadened by introducing a VAT system at the federal level. - Financial sector and capital markets: - Responsibilities of different entities regulating capital markets and participants should be clearly defined. - Close coordination among regulatory entities is needed to ensure a comprehensive supervisory framework for the entire financial sector. - IPO prices should be set by the market through professional underwriters based on appropriate valuations and not by the Ministry of Economy. - Exchange rate and monetary union: - The exchange rate peg has served the U.A.E. well; the choice of exchange rate regime under the planned Gulf Cooperation Council monetary union remains open. - Data, statistics, and transparency: - Numerous structural weaknesses in data quality need to be addressed urgently. - Given planned increase in borrowing by local government entities, it is crucial that data on domestic and external debt be compiled. ### Boxed Institutional and Fiscal Details (Box 1 highlights) - Federal revenue and emirate contributions: - The federal government’s revenue (primarily cash contributions from Abu Dhabi and Dubai) constitutes only 15 percent of the consolidated U.A.E. budget. - Abu Dhabi accounts for about 65 percent and 80 percent of the U.A.E.’s expenditures and revenues, respectively. - Public sector restructuring: - Public sector is undergoing a major shift to restructure and outsource many activities to the private sector. - Planned development expenditures over the next 5 years are estimated at over $350 billion, a significant part to be shouldered by the private sector. - Federal role: - The federal government provides basic social services, sets regulations and minimum standards, represents the U.A.E. internationally, and often leads public administration reforms. * _cr06257 - Executive Summary._ ### 15. Money and credit developments in 2005 took place against a continued ### _cr06257 - 15. Money and credit developments in 2005 took place against a continued ### Money and credit developments (2005–early 2006) - Broad money growth remained strong at about 34 percent (Table 4), driven mainly by 44.5 percent growth in credit to the private sector. - Most categories of private sector credit increased significantly: - Loans to construction increased by 32 percent. - Personal loans increased by 93 percent. - At end-2005, direct credit to the equity markets and mortgage loans accounted for about 40 percent of total personal loans. - Excluding direct credit extended to the equity market, broad money increased by 27 percent. - In the first 2 months of 2006, following the regional equity market decline that started in late 2005: - Net foreign assets of the banking system declined by about AED 30 billion. - Claims on the private sector increased by 13 percent. - Broad money grew by 2.3 percent. ### Financial sector developments and risks - Banks’ exposures and balance sheets: - Lending to construction rose by 2 percentage points to 12 percent of total credit. - Direct lending to the equity markets increased by 5 percentage points to 6 percent of total credit. - Some banks reportedly leveraged investments in excess of the permitted bank margin lending ratio of 5 to 1. - Asset quality and capital: - The stock of nonperforming loans (NPLs) increased by 2.4 percent in 2005. - Ratio of NPLs to total loans declined to 8.3 percent from 12.5 percent in 2004 (Table 5). - Provisions were considerable, bringing net NPLs ratio to total loans below 2 percent. - Capital assets ratio remained high at 17.4 percent. - Banks’ balance sheet increased by 40 percent to AED 608.5 billion (about $166 billion). - On an aggregate basis, banks complied with the CBU’s prudential norms. - Profitability and income composition: - Banks’ profits more than doubled to $5.1 billion in 2005. - Non-interest income increased by over 112 percent and accounted for about one third of total banks’ income. - Fee and commission income on IPO subscriptions and income from banks’ equity market investments were major contributors. - Concentration and credit risk: - Increased concentration of bank loans to a few large business groups is a key risk. - CBU single borrower limit is appropriate; consideration may be given to reducing the limit on total large exposures, currently set at 8 times the capital base. - CBU needs to start including off-balance sheet items and interbank exposures with maturity less than 12 months in the definition of large exposures. ### Capital markets: developments and characteristics - 2005 performance drivers: - Capital markets posted strong growth in 2005 driven by ample liquidity, strong macroeconomic growth, low interest rates, and strong corporate performance. - DFM and ADSM indices gained 132 percent and 69 percent, respectively, in 2005. - U.A.E. led the region in market capitalization, market activities, and number of IPOs (11). - Corrections and causes (as of end-April 2006): - DFM declined by about 55 percent and ADSM by about 40 percent since their peaks in November 2005. - Sharp corrections were attributed to market overvaluation and liquidation to fund IPO subscriptions. - IPO pricing process: - Ministry of Economy (MOE) sets IPO prices at a nominal value of company shares rather than via market valuation. - MOE sets prices for subsequent offerings, usually at a substantial discount, contributing to underpricing, over-subscription, and volatility. - Example IPO statistics: - Two IPOs issued in March 2006 were over-subscribed by 500 times and 165 times the shares offered. - Bids were $74 billion (about 60 percent of 2005 GDP), and $109 billion (about 85 percent of 2005 GDP), respectively. - Simultaneous IPOs attracted more than $180 billion from investors (compared to IPOs of $809 million), creating a liquidity crunch and triggering a DFM correction of almost 12 percent on March 14, 2006. - DIFC and regulatory progress: - Considerable progress made on regulatory framework governing the Dubai International Financial Center (DIFC); extensive laws enacted benchmarked to best international practices. - As of mid-February 2006, 160 companies and 40 financial institutions licensed to operate within the free zone; actual volume of business in DIFC still relatively small. ### Policy recommendations for capital markets and supervision (Box 4 highlights) - IPO pricing and Company Law: - Amend Company Law so subscription prices for new offerings are set by the market through professional underwriters based on company valuation. - Restrict intervention in pricing of subsequent offerings (limit on discount of market price). - Margin lending and collateral: - Replace CBU system that sets multiple margin rates for the same publicly traded security with a single rate per class of securities. - Staff recommends maximum loan value for most liquid traded stocks be set at 50 percent. - Regulatory clarity and powers: - Define responsibilities of entities regulating capital markets; close regulatory gaps; give regulatory authorities clear powers to set and enforce prospectus requirements and corporate governance standards. - Market structure improvements: - Increase size of public float of securities to promote deeper, more liquid markets. - Increase size of institutional investors and introduce market stabilization mechanisms (market maker system, hedging instruments). - Data and oversight: - Improve collection and dissemination of statistical information on non-bank financial intermediaries (mutual funds, investment companies, brokerage firms). - Conduct a comprehensive assessment of the capital markets regime against IOSCO standards; assess DIFC alongside the rest of the U.A.E. for regulatory coordination and gap identification. ### Macroeconomic outlook and medium-term scenarios - Near term (2006): - Economic growth projected to remain buoyant in 2006; real nonhydrocarbon activity expected to remain high and oil production rising significantly. - Recent equity market correction and rise in domestic interest rates (in line with U.S. dollar rates) expected to dampen domestic demand. - Stabilization of rental costs (Dubai has a 15 percent cap on rental increases until end-2006) and fading impact of the 2005 fuel price hike could balance inflationary pressures. - Medium term (2007–11): - Oil production projected to increase steadily to 3.5 million barrels per day by 2011. - Real nonhydrocarbon growth projected to settle at 6.5–7.0 percent during 2007–11. - External current account and overall fiscal surpluses projected to remain sizeable. - WEO-based oil price projection: oil prices are projected to remain high and decline only marginally to an average of $67.3 during 2006–11. - Risks: - Downside risks from a drop in oil prices are somewhat limited; staff estimates that for each $1 drop in the price of a barrel of oil, on average, the fiscal balance will weaken by only about 0.5 percent of GDP during 2006–11. - Additional risks warranting close monitoring: asset price developments in equity and real estate markets and accelerating inflationary pressure. - Considerable supply of residential units expected by early 2007 could put downward pressure on real estate prices. ### Fiscal policy, public finance reforms, and planned investments - Fiscal coordination and transparency: - Overall coordination between federal and emirates’ governments remains weak; each emirate implements fiscal policy independently. - Need to improve fiscal transparency by adopting international standards of classification for expenditure and revenue statistics. - Ministry of Finance and Industry has asked for a Fund advisor to help set up a macro-fiscal unit. - Revenue and subsidy reforms: - Broadening of the revenue base likely driven by prospective adoption of a VAT in the context of the GCC monetary union; federal authorities indicate implementation will await a GCC ministerial decision. - Need to reduce subsidies on water and electricity gradually and replace them by targeted payments to nationals below a certain income. - GPSSA needs major overhaul; actuarial study to be completed soon to inform reform strategy. - Expenditure and investment plans: - Abu Dhabi plans to outsource most non-core budgetary activities and reduce government size; an additional 20,000 jobs expected to be outsourced to the private sector in 2006, resulting in a significant reduction (about 40 percent) in its public work force. - Authorities intend to eliminate agricultural subsidies by 2008. - Authorities planning to increase development expenditures significantly in 2006 and over the medium-term. - Major announced investment estimates: - Total investment in Dubai over the medium-term conservatively estimated at $200 billion. - About $160 billion worth of projects planned for Abu Dhabi. - A major $25 billion investment plan for upgrading upstream and downstream production capacity is underway in Abu Dhabi. - Oil production capacity planned to expand from 2.9 million barrels to 3.5 million barrels per day within the next five to seven years. - In 2006, federal government development expenditures projected to increase by ten fold on health and education and by 400 percent on public housing. - Examples of planned projects (Dubai and Abu Dhabi): - Dubai projects listed with announced values: Dubai International Airport expansion ($4 billion); Palm Jumeirah ($5 billion); Palm Jebel Ali ($7.5 billion); Palm Deira ($12.5 billion); Dubai light rail transport project ($3 billion); Jebel Ali Airport city ($20 billion); Dubai Land ($10 billion); Dubai Aerospace Enterprise ($15 billion); Emirates Pearl ($9.5 billion); investments in utilities ($15 billion) and roads ($5 billion). - Abu Dhabi projects include a new port ($2.5 billion), airport expansion ($5.7 billion), several large real estate projects, and a joint venture between DUBAL and Mubadala. - Abu Dhabi also has a $25 billion investment plan to upgrade upstream and downstream production capacity and significant investments in natural gas production and petrochemicals. ### Monetary policy stance and recommended prudential measures - Monetary policy constraints: - Fixed exchange rate system and full capital account convertibility limit effectiveness of monetary policy. - Recent sizeable capital outflow in early 2006 appears to have tightened monetary conditions, but tightening could be temporary given scale of real estate and infrastructure projects. - Recommended measures if credit growth remains strong: - Raise reserve requirements on demand deposits. - Introduce tighter prudential norms for banks and non-bank financial institutions, including margin lending, collateral valuation and provisioning requirements. - Increase certain risk weights for capital calculations. - Consider gradual lowering of the percent at which individuals can borrow against their salaries (current limit: individuals can borrow up to 40 percent of their salaries). - Authorities indicated they are considering these recommendations. *Source: IMF staff report excerpts contained in the supplied PDF content unit.* ### 33. The broadening of FDI opportunities in the free zones in Dubai is a welcome ### _cr06257 - 33. The broadening of FDI opportunities in the free zones in Dubai is a welcome ### FDI and company law - The broadening of FDI opportunities in the free zones in Dubai is described as a welcome development. - The U.A.E. is amending the Commercial Company Law, applicable across the federation, which may see the ceiling on foreign ownership raised from the current 49 percent. - There is a need to pass the new Company Law that includes higher foreign ownership thresholds. ### Labor market, wages, and employment - Wages and productivity - The average 20 percent increase in wages in 2005 is noted. - Wage increases might be exceeding that of productivity gains. - The significant increase in the prices of non-tradable goods and services and some infrastructural bottlenecks could impact the competitiveness of the non-oil economy. - The private sector believes that wage increases are exceeding productivity gains. - Labor composition and policy - Most private sector jobs have been filled by expatriate workers; the majority of nationals continue to seek employment in the public sector. - Authorities have implemented measures to increase the costs associated with hiring expatriate workers and applied a wide-range of quotas to increase the employment of nationals in different economic sectors. - It is critical that changes to labor policy do not adversely impact the competitiveness of the economy. - Employment opportunities for nationals will need to be created through long-term structural policies in the areas of education, training, wage policy, and labor legislation. - A new labor law expected to be passed by year-end grants workers the rights to peacefully assemble and to form trade unions. ### External sector and exchange rate - Exchange rate policy - The authorities stressed that the pegged exchange rate regime has served the U.A.E. economy well by providing a nominal anchor and strengthening confidence in its economic policy. - While the equilibrium real exchange rate may have appreciated due to the positive terms-of-trade shock resulting from higher oil prices, the authorities do not foresee a change in the exchange rate policy in the period leading up to the planned establishment of the GCC monetary union by 2010. - At the point of monetary union, all options would remain open regarding the exchange rate regime under the monetary union. - Real and nominal effective exchange rates - Reflecting developments in the dollar exchange rate, and notwithstanding the depreciation observed during 2002-04, the real effective exchange rate (REER) has appreciated by about 25 percent since 1990. - Until recently, the cumulative appreciation of the U.A.E. dirham did not seem to have eroded competitiveness because productivity gains appeared to have kept up with the REER appreciation. - Competitiveness of the non-oil economy may come under pressure if productivity gains do not keep up with wage increases and if inflationary pressures are not contained. ### GCC coordination and trade agreements - Continued coordination among the GCC countries ahead of the envisaged monetary union is ongoing. - Legislative harmonization - GCC countries have agreed on a common trademark law and are working on common anti-dumping and subsidies legislation. - Deliberations are continuing on the necessary institutional and legal changes needed for the monetary union. - Trade agreements - At the GCC level, a free trade agreement (FTA) with the EU is in the final stages of negotiation and is expected to be signed during 2006. - Negotiations on other FTAs are underway with a number of countries. - On a bilateral basis, the U.A.E. is negotiating a FTA with the United States. - The authorities indicated that in the future all FTAs would be negotiated at the GCC level. ### Statistical issues and data weaknesses - Major weaknesses - The U.A.E.’s economic statistics suffer from structural weaknesses in data quality, coverage, periodicity, timeliness, and inter-sectoral consistency, with shortcomings particularly serious in the fiscal area. - Data compilation and reporting are hampered by a shortage of trained staff and poor coordination within and between the emirates and federal government agencies. - Recommended actions - There is an urgent need to develop an effective program of reforms to strengthen the institutional framework and build-up a strong, comprehensive, and consistent statistical system. - It is crucial that data on off-budget fiscal operations and on domestic and external debt at the emirate level be compiled. - The authorities are urged to finalize the GDDS metadata and nominate a GDDS coordinator. - Ongoing and planned surveys - Officials at the MOE pointed out that the population census has been completed and its results will be published in 2006. - The household budget and the business establishment surveys are expected to be completed by end-2006. - A number of experts were hired to strengthen statistical capacity at the ministry. - Given the fast evolving structure of the economy, increasing linkages to international capital markets, and the planned GCC-wide monetary union by 2010, a comprehensive plan to address data weaknesses across economic sectors is required. - Specific data needs - There is an urgent need to improve the collection, compilation, and reporting of fiscal, national accounts, balance of payments, and price statistics (monthly CPI). - While core data provision is adequate for overall surveillance purposes, data shortcomings have significantly affected staff analysis of some key issues central to surveillance. ### Staff appraisal — outlook, risks, and policy recommendations - Economic transformation and outlook - The U.A.E. is capitalizing on gains from high oil prices and from the transformation of Dubai as a regional hub for trade, commerce and finance. - Stronger economic fundamentals and a pro-business approach are resulting in high levels of domestic and foreign investment in manufacturing, services, and real estate sectors. - These dynamics bode well for the economy’s medium-term growth prospects. - Emerging vulnerabilities and data gaps - Fast evolving economic structure could create vulnerabilities: growth in capital markets has fostered expansion of financial institutions and instruments and a significant increase in capital flows. - Significant borrowing by state-owned entities and governments like Dubai is expected; absence of comprehensive data on such activities precludes meaningful assessment and could mask vulnerabilities. - Fiscal policy guidance - The large increase in social and infrastructure expenditure envisaged by the authorities is broadly appropriate, provided it is balanced with underlying risk factors. - Fiscal stance should be commensurate with the absorptive capacity of the economy and maintaining macroeconomic stability. - To improve the effectiveness of fiscal policy there is need to improve fiscal policy coordination among the emirates and the federal government; the economic planning committee could play a more active role. - Assessment of overall fiscal developments is handicapped by considerable off-budget fiscal operations at the emirates level, particularly in Dubai. - Specific fiscal recommendations - Wage increases in the public sector should be increasingly linked to productivity. - Subsidies on water and electricity should be phased out and replaced by targeted payments to nationals below a certain income. - Introduce legislation to reform the General Pension and Social Security System while it is running operational surpluses. - Start preparatory work based on FAD’s recommendations for the introduction of a VAT system at the federal level. - Monetary and financial sector guidance - Authorities are urged to monitor inflation, credit growth, and asset price developments and adjust policy accordingly. - If rapid increase in private sector credit and inflationary pressure persist in 2006 and beyond, financial policies will have to be tightened; much of the burden of adjustment will fall on public spending because of limitations of monetary policy. - The U.A.E. banking system is strong and effectively supervised, but increased lending for real estate and equity financing has led to a rise in credit risk. - Banks' direct and indirect exposure to these markets and increased loan concentration to a few large business groups call for close monitoring by the CBU, and adequacy of prudential regulation should be kept under review. - Close supervision of banks that recorded significant growth in profits from equity markets related activities is particularly needed. - Capital markets regulation - The regulatory structure of the capital markets and intermediary activities are potential sources of fragility; many parts of the legal regime governing securities markets activities need updating. - Authorities are urged to address gaps in market regulation, rationalize overlaps in responsibilities, and improve oversight. - Appropriate pricing of IPOs will reduce market volatility and dampen unreasonable profit expectations by retail investors. - Rationing subscription allotments would no longer be necessary once IPOs are priced appropriately and according to the true value of the issuing company. - Authorities are urged to only permit IPOs for companies that have had audited balance sheets for at least two years. - The staff welcomes the authorities’ agreement for a full assessment of the capital markets regime in the U.A.E. against the standards set by the International Organization of Securities Commissions. - Officials at the DIFC agreed to an assessment of the DIFC’s legal regime and of the operations of the Dubai Financial Service Authority; a mission for that purpose could take place before year-end. - Exchange rate regime preparedness - The staff concurs that the pegged exchange rate regime has served the U.A.E. well and welcomes the authorities' openness to the choice of exchange rate regime under the planned monetary union. - Since more flexible regimes would require greater institutional development in foreign exchange markets, risk management, and intervention policies, staff urges the authorities to begin formulating strategies to develop these areas early to keep options open. *Source: IMF staff report content provided in the supplied PDF extract.* ### 54. It is proposed that the next Article IV consultation take place on the standard ### _cr06257 - 54. It is proposed that the next Article IV consultation take place on the standard ### Key economic indicators (U.A.E., 2002–06) - GDP at market prices (In billions of U.A.E. dirhams): 273.93 (2002), 323.83 (2003), 384.14 (2004), 476.36 (2005), 642.0 (2006 est./proj.) - Crude oil production (millions of barrels per day) 1/: 2.26 (2002), 2.59 (2003), 2.66 (2004), 2.72 (2005), 2.97 (2006) - Condensates (millions of barrels per day): 0.33, 0.33, 0.33, 0.34, 0.37 - Average UAE crude price (US dollars per barrel): 24.75 (2002), 28.11 (2003), 36.30 (2004), 52.60 (2005), 67.25 (2006) - WEO oil price (US$ per barrel): 24.95 (2002), 28.89 (2003), 37.76 (2004), 53.35 (2005), 68.00 (2006) - Natural gas production (billions of cubic meters per year): 43.4, 44.4, 45.4, 46.4, 47.8 - LNG exports: 7.1, 7.4, 8.1, 7.5, 7.6 - NGL exports: 11.9, 13.1, 13.0, 13.4, 13.8 - Real GDP (at factor cost, annual percent change): 2.6 (2002), 11.9 (2003), 9.7 (2004), 8.5 (2005), 10.7 (2006) - Crude oil, condensates and natural gas (annual percent change): -7.6, 13.6, 2.9, 2.1, 11.0 - Non-hydrocarbon sectors 2/ (annual percent change): 7.7, 11.2, 12.6, 11.0, 10.5 - Inflation and prices: - GDP deflator 3/: 3.5 (2002), 6.1 (2003), 9.2 (2004), 17.3 (2005), 17.5 (2006) - Consumer prices: 2.9 (2002), 3.1 (2003), 5.0 (2004), 8.0 (2005), 7.7 (2006) - Trade volumes: - Volume of imports (annual % change): 9.4, 6.7, 26.1, 21.9, 24.8 - Volume of non-oil exports (annual % change): 10.4, 25.8, 36.5, 14.0, 15.9 ### Investment, saving, and fiscal aggregates - Investment and saving (percent of GDP): - Gross domestic investment: 24.1 (2002), 23.5 (2003), 22.3 (2004), 24.4 (2005), 26.6 (2006) - Government: 4.6, 5.0, 4.0, 2.8, 3.8 - Non-government: 19.6, 18.5, 18.3, 21.6, 22.9 - National saving: 28.2, 31.6, 32.5, 39.1, 46.9 - Government: 15.5, 18.4, 21.8, 30.9, 34.2 - Non-government: 12.7, 13.2, 10.7, 8.2, 12.8 - Consolidated government finances (percent of GDP unless noted): - Revenue: 42.0 (2002), 41.3 (2003), 42.5 (2004), 49.4 (2005), 48.6 (2006) - Hydrocarbon: 32.8, 32.9, 32.8, 38.4, 38.2 - Nonhydrocarbon: 9.2, 8.4, 9.7, 11.1, 10.3 - Investment income (of total revenue): 3.2, 3.1, 4.4, 5.8, 5.9 - Expenditure: 31.6 (2002), 28.3 (2003), 24.3 (2004), 22.5 (2005), 18.9 (2006) - Current: 26.4, 22.9, 20.7, 18.5, 14.4 - Development 4/: 4.8, 5.0, 3.4, 3.8, 4.3 - Current balance: 15.5 (2002), 18.4 (2003), 21.8 (2004), 30.9 (2005), 34.2 (2006) - Overall balance: 10.4 (2002), 13.0 (2003), 18.2 (2004), 26.9 (2005), 29.7 (2006) - Overall balance (excluding investment income): 7.1, 10.0, 13.8, 21.1, 23.8 - Excluding hydrocarbon revenue: -25.7, -22.9, -19.0, -17.3, -14.5 - Financing: -10.4, -13.0, -18.2, -26.9, -29.7 - Domestic banks: -3.1, -0.7, -0.5, -3.4, -2.5 - Other: -7.3, -12.3, -17.8, -23.5, -27.2 - Government debt 5/: 5.3 (2002), 6.7 (2003), 8.4 (2004), 9.5 (2005), 9.1 (2006) ### Balance of payments and external sector (2002–06) - Exports (In percent of GDP): 51.8 (2002), 66.8 (2003), 89.0 (2004), 118.8 (2005), 155.6 (2006) - Crude oil: 16.6, 22.1, 29.6, 43.5, 60.8 - Petroleum products: 3.0, 3.3, 4.4, 5.8, 7.4 - Gas: 3.3, 3.8, 4.8, 5.8, 9.8 - Non-hydrocarbon exports: 10.6, 14.0, 18.3, 22.4, 25.6 - Re-exports: 18.3, 23.4, 33.9, 41.3, 52.1 - Imports, f.o.b. (percent of GDP): -37.5 (2002), -45.8 (2003), -63.4 (2004), -80.8 (2005), -99.5 (2006) - Trade balance (percent of GDP): 14.2, 20.9, 27.6, 38.0, 56.1 - Services (net, percent of GDP): -7.7, -9.1, -12.1, -15.1, -18.9 - Income (net, percent of GDP): 0.8, -0.1, 0.2, 2.0, 4.7 - Transfers (net, percent of GDP): -4.4, -4.7, -5.1, -5.8, -6.5 - Private transfers: -4.1, -4.4, -4.6, -5.4, -6.0 - Official transfers: -0.3, -0.3, -0.4, -0.4, -0.5 - Current account balance (in billions of U.S. dollars): 3.0 (2002), 7.1 (2003), 10.6 (2004), 19.1 (2005), 35.5 (2006) - Current account (In percent of GDP): 4.1, 8.1, 10.2, 14.7, 20.3 - Overall balance (In billions of U.S. dollars): 1.1 (2002), -0.2 (2003), 3.5 (2004), 2.5 (2005), 3.5 (2006) - Financial account balance (In billions of U.S. dollars): -7.3 (2002), -7.8 (2003), -8.4 (2004), -19.9 (2005), -31.9 (2006) - Private capital (In billions of U.S. dollars): -1.9 (2002), 3.9 (2003), 10.2 (2004), 10.6 (2005), 15.7 (2006) - Official capital 3/: -5.4, -11.7, -18.6, -30.5, -47.6 - Central Bank reserves (gross, in billions of U.S. dollars): 15.3 (2002), 15.1 (2003), 18.6 (2004), 21.1 (2005), 24.6 (2006) - In months of imports: 4.0 (2002), 2.9 (2003), 2.8 (2004), 2.5 (2005), 2.8 (2006) ### Monetary survey highlights (2002–06) - Net foreign assets (end of period, in millions of U.A.E. dirhams): 128,654 (2002), 131,847 (2003), 145,313 (2004), 166,820 (2005), 186,388 (2006 proj.) - Foreign assets: 166,960, 167,255, 194,654, 253,177, 301,213 - Foreign liabilities: 38,306, 35,408, 49,341, 86,357, 114,826 - Net domestic assets: 40,597 (2002), 64,703 (2003), 96,929 (2004), 157,244 (2005), 224,011 (2006 proj.) - Domestic liquidity (M2, in millions of U.A.E. dirhams): 169,251 (2002), 196,550 (2003), 242,242 (2004), 324,064 (2005), 410,398 (2006 proj.) - Money: 47,054, 58,262, 80,818, 104,449, 132,279 - Quasi-money: 122,197, 138,288, 161,424, 219,615, 278,119 - Foreign currency deposits (mem. item): 39,612, 47,980, 62,496, 73,804, 88,565 - Dirham time and savings deposits: 82,585, 90,308, 98,928, 145,811, 189,554 - Claims on private sector (end-period): 149,352 (2002), 169,469 (2003), 211,407 (2004), 305,546 (2005), 395,666 (2006 proj.) - Monetary growth (changes in percent of initial stock of M2): Broad money (M2): 15.6, 16.1, 23.2, 33.8, 26.6; Foreign assets (net): 20.1, 1.9, 6.9, 8.9, 6.0; Domestic assets: -4.5, 14.2, 16.4, 24.9, 20.6 ### Selected indicators of external vulnerability and financial sector (2001–05) - External solvency and debt: - REER (CPI-based, percent change, annual average): 4.1 (2001), -1.3 (2002), -6.9 (2003), -4.5 (2004), -0.7 (2005) - Total external debt (in billions of U.S. dollars): 19.4 (2001), 16.7 (2002), 16.5 (2003), 22.6 (2004), 36.5 (2005) - Short-term debt (BIS, in billions of U.S. dollars) 1/: 8.8, 9.3, 9.2, 12.6, 20.3 - Total external debt / GDP (percent): 27.9, 22.4, 18.7, 21.6, 28.1 - Short-term debt/exports of goods and services (percent): 17.6, 17.1, 13.2, 13.4, 16.7 - Public sector solvency indicators: - Overall fiscal balance/GDP: -0.4 (2001), 10.4 (2002), 13.0 (2003), 18.2 (2004), 26.9 (2005) - Government domestic debt/GDP: 4.0, 5.3, 6.7, 8.4, 9.5 - Oil revenue/total revenue: 71.6, 78.1, 79.7, 77.2, 77.6 - Investment income/total revenue: 12.3, 7.7, 7.4, 10.3, 11.8 - Non-oil balance/GDP: -26.9, -22.4, -19.9, -14.6, -11.4 - External liquidity indicators: - Central Bank foreign assets (millions of U.S. dollars): 14,288 (2001), 15,311 (2002), 15,117 (2003), 18,610 (2004), 21,064 (2005) - Central Bank foreign assets (in months of imports of goods and services): 4.6, 4.0, 2.9, 2.8, 2.5 - As percent of M1: 133.0, 119.5, 95.3, 84.6, 74.1 - As percent of short-term external debt 1/: 162.4, 164.6, 164.2, 147.6, 103.6 - Financial sector indicators: - Foreign currency deposits/total deposits (percent): 24.4, 25.2, 26.3, 27.6, 24.1 - Net domestic assets (annual change in percent): 21.3, -14.0, 59.4, 49.8, 62.2 - Private sector credit (annual change in percent): 8.8, 11.3, 13.5, 24.7, 44.5 - Private credit/total assets of banks (percent): 47.4, 47.3, 48.2, 48.9, 50.2 - Commercial banks' capital to risk-weighted assets ratio: 19.8, 19.0, 18.6, 16.9, 17.4 - Gross non-performing loans/total lending (percent): 15.7, 15.3, 14.3, 12.5, 8.3 - Return on assets: 1.9, 1.9, 1.9, 2.1, 2.7 - Return on equity: 15.5, 16.2, 16.8, 18.6, 23.0 - Average interest rate spread (percentage points) 4/: 4.7 (2001), 5.6 (2002), 5.1 (2003), 4.9 (2004), 4.1 (2005) ### Medium-term baseline scenario (2005–11) — key projections - Crude oil production (millions of barrels per day) 1/: 2.72 (2005), 2.97 (2006), 3.07 (2007), 3.15 (2008), 3.22 (2009), 3.31 (2010), 3.46 (2011) - Condensates: 0.34, 0.37, 0.38, 0.39, 0.40, 0.41, 0.43 - Average U.A.E. oil export price (US$/barrel) 2/: 52.60 (2005), 67.25 (2006), 70.25 (2007), 68.75 (2008), 67.50 (2009), 66.25 (2010), 64.25 (2011) - Natural gas production and exports (billions cubic meters per year): Natural gas production: 46.4 (2005), 47.8 (2006), 49.2 (2007), 50.7 (2008), 52.2 (2009), 53.8 (2010), 55.9 (2011) - LNG exports: 7.5, 7.6, 7.7, 7.8, 8.0, 8.1, 8.3 - NGL exports: 13.4, 13.8, 14.2, 14.6, 15.1, 15.5, 16.2 - Nominal GDP (In billions of U.A.E. dirhams): 476.36 (2005), 642.06 (2006), 697.07 (2007), 728.97 (2008), 764.38 (2009), 802.98 (2010), 844.9 (2011 proj.) - Real GDP (at factor cost, percent): 8.5 (2005), 10.7 (2006), 5.8 (2007), 5.5 (2008), 5.4 (2009), 5.6 (2010), 6.0 (2011) - Crude oil and natural gas (percent): 2.1 (2005), 11.0 (2006), 3.5 (2007), 2.5 (2008), 2.5 (2009), 2.7 (2010), 4.5 (2011) - Non-hydrocarbon (percent) 4/: 11.0 (2005), 10.5 (2006), 6.6 (2007), 6.5 (2008), 6.4 (2009), 6.5 (2010), 6.4 (2011) - Consumer prices (percent): 8.0 (2005), 7.7 (2006), 5.0 (2007), 4.7 (2008), 3.6 (2009), 3.7 (2010), 3.7 (2011) - National saving (percent of GDP): 37.4 (2005), 46.9 (2006), 46.6 (2007), 48.5 (2008), 49.3 (2009), 51.0 (2010), 53.0 (2011) - Government saving: 30.9, 34.2, 34.5, 33.6, 31.8, 31.1, 30.5 - Non-government saving: 6.5, 12.8, 12.1, 14.9, 17.5, 19.9, 22.5 - Gross domestic investment (percent of GDP): 24.4 (2005), 26.6 (2006), 27.4 (2007), 29.7 (2008), 30.9 (2009), 32.4 (2010), 33.9 (2011) - Government: 2.8, 3.8, 3.9, 4.1, 4.2, 4.3, 4.5 - Non-government: 21.6, 22.9, 23.5, 25.6, 26.7, 28.0, 29.4 - Consolidated fiscal accounts (In billions of U.A.E. dirhams, selected): - Revenue: 235.43 (2005), 311.93 (2006), 338.23 (2007), 347.93 (2008), 350.33 (2009), 362.83 (2010), 376.1 (2011) - Hydrocarbon revenue: 182.7, 245.6, 257.8, 258.2, 249.4, 250.9, 253.1 - Non-hydrocarbon revenue: 52.7, 66.3, 80.4, 89.6, 100.9, 111.9, 123.1 - Investment income: 27.7, 38.1, 51.7, 60.2, 70.7, 80.9, 91.5 - Expenditure (In billions): 107.2 (2005), 121.3 (2006), 129.6 (2007), 137.2 (2008), 144.8 (2009), 152.8 (2010), 161.4 (2011) - Current expenditure: 88.1, 92.6, 97.9, 102.7, 107.7, 112.9, 118.5 - Development: 13.5, 24.2, 27.1, 29.9, 32.2, 34.8, 37.6 - Overall balance (In billions): 128.2 (2005), 190.7 (2006), 208.6 (2007), 210.7 (2008), 205.5 (2009), 210.0 (2010), 214.8 (2011) - Overall balance (In percent of GDP): 26.9 (2005), 29.7 (2006), 29.9 (2007), 28.9 (2008), 26.9 (2009), 26.2 (2010), 25.4 (2011) - Excluding hydrocarbon revenue and investment income (In percent of GDP): -17.3 (2005), -14.5 (2006), -14.5 (2007), -14.8 (2008), -15.0 (2009), -15.2 (2010), -15.4 (2011) ### Appendix I — Fund relations (as of March 31, 2006) and Article IV - Membership: Joined 9/22/72; accepted Article VIII status in February 1974. - Quota and holdings (SDR million; percent of quota): - Quota: 611.70 (100.00) - Fund holdings of currency: 541.98 (88.60) - Reserve position in Fund: 70.32 (11.50) - SDR Department: - Net cumulative allocation: 38.74 (100.00) - Holdings: 7.30 (18.85) - Outstanding Purchases and Loans: None - Financial arrangements: None - Projected payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): Principal charges/Interest: 0.81 (2006), 1.09 (2007), 1.09 (2008), 1.09 (2009), 1.09 (2010); Total same as principal charges/interest entries. - Exchange rate arrangement: - Dirham officially pegged to the SDR at AED 4.76190 = SDR 1 from November 1980 to February 2002; in practice pegged to the dollar at a fixed parity. - Since commitments toward a common GCC currency, the dirham has become officially pegged to the U.S. dollar. The mid-point between official buying and selling rates has been AED 3.6725 = $1 since November 1997. - Exchange system: Free of restrictions on payments and transfers for current international transactions, except for restrictions not yet notified to the Fund in accordance with Executive Board Decision No. 144 (52/51). - Article IV consultation: - The U.A.E. is on the standard 12-month consultation cycle. - The last Article IV consultation discussions were held during March 16–30, 2005; staff report (IMF Country Report No. 05/269) and Selected Issues and Statistical Appendix (IMF Country Report No. 05/268) were considered by the Executive Board on July 1, 2005. - It is proposed that the next Article IV consultation take place on the standard 12-month cycle. ### Technical assistance and institutional notes - Technical assistance provided (selected items and dates as recorded): - STA: Multi-sector, June 1993; Multi-sector, December 2003; Data collection and balance of payments, December 1995; Terms of reference and arrangements for resident advisor in balance of payments, April 1997; International reserves, May 1998; Coordinated Portfolio Investment Survey, April 2004. - FAD: Government financial management, June 1994; Public Expenditure Management, November 2000; Public Expenditure Management follow up, May 2003; Revenue Diversification and VAT Feasibility, November 2005; Public Financial Management, November 2005; Gulf Cooperation Council: Options for Indirect Taxation, March 2006; UAE: Options for New Indirect Taxation and Intergovernmental Fiscal Relations, March 2006. - MFD: Anti-Money Laundering/Combating terrorist financing, March 2004. - Resident representative: None. *Source: IMF staff estimates and U.A.E. authorities as reported in the supplied IMF country documents.* ### 1994. It replaced the previous arrangement based on ad-hoc requests. The first ### _cr06257 - 1994. It replaced the previous arrangement based on ad-hoc requests. The first ### Development projects and programs - Annual Work Program of 1995–96 included two main studies: - Comprehensive Health Assessment Study - Study to restructure Government Information Authority, the Government’s computer center - Education sector, recruitment and welfare (completed in 2000): - Public Expenditure Review for the Education Sector - Review and Assessment of Recruitment Procedures for the Federal government - Analysis of Distribution of Welfare in Abu Dhabi - Environmental Assessment: - August 2003: U.A.E. showed interest in Bank support for a U.A.E.-wide environmental assessment - A Bank needs-assessment mission visited Dubai early in 2004 to develop the project concept - Investment Climate (Ras Al Khaimah, RAK): - World Bank mission visited RAK in late February 2004 - TORs prepared for the first of a four-phase program; agreement signed in late March 2004 - Second phase: assessment of the investment climate in RAK - Investors’ Promotion Conference held May 27–28, 2005 ### United Arab Emirates: Statistical Issues — overview - Principal causes of data shortcomings: - Inadequate compilation techniques - Infrequent data reporting - Shortage of trained staff - Insufficient resources for data gathering - Poor information flow between Federal and Emirate governments and public sector entities - Consequences: - Provision of data to the Fund between missions remains poor, except for monetary and fragmentary trade statistics - Most official statistics are produced only on an annual basis ### STA assistance and GDDS participation - 2003 STA multisector statistics mission findings: - Methodology generally appropriate but serious deficiencies exist in most sectors - Deficiencies due to lack of sufficient and regular data sources in the real sector; inadequate coordination among data compiling agencies; constraints from distribution of personnel and financial resources between the Federal government and the largest Emirates - Draft GDDS metadata prepared with U.A.E. officials in 2003 - Delay in appointing a GDDS coordinator implies updates of the 2003 metadata will be required for GDDS participation - U.A.E. hosted a GDDS workshop in Abu Dhabi during February 27–March 9, 2005 ### Real sector — key weaknesses - Consumer Price Index (CPI): - Compiled annually by the Ministry of Economy (MOE), disseminated three months after the end of the reference year - Methodological shortcomings: - (i) outdated weights not representative of all geographic regions - (ii) no imputations for missing price data - (iii) replacement product prices not adjusted for changes in quality - (iv) base price and expenditure weights refer to different periods - MOE and Central Bank plan to improve compilation and frequency of the CPI - No producer price index, import price index, or export price index compiled - National accounts (GDP): - MOE compiles annual GDP by production and expenditure approach in current and constant 1995 prices - Compilation system relies heavily on administrative and ad-hoc data; lacks a comprehensive data collection program - Last benchmark data available for compiling output: 1995; for intermediate consumption: 1980 - Basic data inadequate for manufacturing, construction, wholesale and retail trade, and most service sectors - Real value added for petrochemicals (nearly half of total manufacturing value added) is not estimated according to the 1993 SNA methodology; nominal value added is deflated by an estimated import price deflator - Oil and gas sector data are received with a lag from Abu Dhabi National Oil Company (ADNOC) - No national household budget survey has ever been conducted - Statistical techniques used in compiling GDP by production and expenditure approach are described as not sound - Labor statistics: - Census-based statistics broadly in line with ILO recommendations but diverge from ILO definitions; concepts inconsistent and updates irregular/incomplete - Lack of regular household surveys prevents annual compilation of wages, unemployment, labor force, and employment - Wage statistics available only for a small proportion of government employees ### Fiscal sector — key weaknesses - Main deficiencies: - Lack of coordination among the Emirates and Federal government - Low frequency in reporting government financial operations - MOFI data coverage: - Ministry of Finance and Industry (MOFI) compiles data for the Federal government only - Separate fiscal data for Federal government and three Emirates (Abu Dhabi, Dubai, and Sharjah) are provided to annual Article IV consultations and used by Fund staff to produce a consolidated fiscal account - An annual “consolidated” fiscal statement is published in the central bank’s Statistical Bulletin, differing from Fund staff presentation - Investment income from government assets is not included in the fiscal account published by MOFI; investment income and some expenditure under Rulers’ Offices and municipalities remain off-budget in some Emirates - International standards of economic classification of expenditure and revenue are not fully followed - Reporting to IMF: - Last data reported to STA for Government Finance Statistics Yearbook were for 1999 and covered only the Federal government - No financing information provided by Federal authorities or any of the Emirates - No sub-annual data reported for publication in the IMF’s International Financial Statistics (IFS) - Information on pension fund activities administered through the Federal-level General Pension and Social Security Authority (GPSSA) has been available since the 2002 consultation mission ### Monetary sector — key issues and recommendations - 2001-2005 compilation issues: - Mid-2001: Central Bank of the U.A.E. (CBU) changed banking data compilation to include deposits of U.A.E. residents booked in overseas branches/subsidiaries of locally incorporated banks in broad money and treated cross-border flows back to head offices as “domestic” - This change did not follow residency principle and introduced a bias into banking statistics, especially net foreign positions of commercial banks, of about AED 20 billion - In 2005 authorities reverted to publication of monetary data based on the residency principle - 2003 STA multisector mission recommendations: - Compile two sets of data: a core set for monetary reporting and a supplementary data set for other authorities’ objectives - Reduce lags in monetary statistics (compiled monthly but reported only quarterly) - Ensure full coverage of IMF accounts - Further sectorization of financial transactions, particularly various Emirate government accounts currently reported in aggregate form - Further instrument classification of foreign securities and domestic investments into bonds, shares, and other equities ### External sector — key weaknesses and recommendations - Balance of payments (BOP) issues: - Lack of primary data sources for most transactions - Insufficient staffing for BOP compilation and negligible cooperation from other government agencies - Many entries are estimates based on incomplete information; foreign direct investment (FDI) not covered and only estimated by Fund staff - Major gaps in official and private transfers, oil companies’ service payments, private and official investment income, and financial transactions for all sectors except banks - Progress hampered by staffing limitations in the compilation unit, inadequate inter-agency cooperation, and restrictions on the CBU in collecting data from individuals and institutions other than the banking sector - U.A.E. does not report BOP data for publication in the IMF’s IFS (except irregular trade statistics) or the Balance of Payments Statistics Yearbook (BOPSY) - 2003 STA recommendations: - Introduce a comprehensive data collection system - Review source data and compilation methods for important items such as trade and services - Strengthen human resources for compiling departments in the CBU - Encourage CBU to start reporting time series data on the BOP and methodological notes to STA for publication in the IFS and the BOPSY - Available external data: - Authorities publish and provide data to Fund missions on banking system foreign assets; detailed information on central bank reserves and foreign currency liquidity is available; commercial bank data are reported monthly - Since 2000, Abu Dhabi authorities have provided approximate information on the Emirate’s stock of external assets during Article IV missions - During 2004-06 Article IV consultations, details on the stock of official foreign assets of the government were provided - Authorities do not compile or publish the International Investment Position (IIP) statement - No data collected on FDI or private nonfinancial sector external assets and liabilities; BIS statistics indicate U.A.E.’s external liabilities are relatively small ### Socio-demographic statistics - Institutional arrangements: - MOE leads population census and large surveys; line ministries collect administrative data - Population and housing census conducted every 10 years - Recent and planned activities: - 2005 population census completed but results yet to be published (as of the reporting) - No data exist on measures of income distribution, poverty, and access to basic services - A Household Budget Survey has been initiated and is expected to be completed by the end of 2006 ### Table of Common Indicators Required for Surveillance (As of May 11, 2006) — selected entries and frequencies - Exchange Rates: Date of Latest Observation 04/06; Date Received 05/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M - Reserve/Base Money: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q - Broad Money: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q - Central Bank Balance Sheet: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q - Interest Rates2: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q - Consumer Price Index: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Revenue, Expenditure, Balance and Composition of Financing3 – General Government4: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Revenue, Expenditure, Balance and Composition of Financing3 – Central Government: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Stocks of Central Government and Central Government-Guaranteed Debt5: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - External Current Account Balance: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Exports and Imports of Goods and Services: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data M; Frequency of Reporting A; Frequency of Publication A - GDP/GNP: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A Notes included in the table: - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3 Foreign, domestic bank, and domestic nonbank financing. - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5 Including currency and maturity composition. - 6 Frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). ### Financial Sector Developments — overview - Appendix examines trends in financial soundness indicators, recent developments in the banking system; developments in capital market regulations and supervision; developments in the Dubai International Financial Center; and updates on status of 2001 FSAP mission recommendations ### Banking sector — 2005 developments and risks - Aggregate growth and scale: - Overall size of banks’ balance sheet increased by 40 percent to AED 608.5 billion ($166 billion) - Government deposits in the banking sector increased by 54 percent - Profitability: - Overall rate of return on assets averaged 2.7 percent - Rate of return on equities increased to about 23 percent - Banks’ profits more than doubled to $5.1 billion during 2005 - Income composition: - Non-interest income, excluding income on foreign exchange, increased by over 112 percent and comprised about one third of total banks’ income - Increase driven by fees and commissions on IPO subscriptions and income from banks’ investment in the equity market - IPO financing through margin lending provided banks with ample non-interest-bearing cash for considerable periods of time - Exposures and concentrations: - Lending to the real estate sector, excluding mortgages, increased to 12 percent of total credit from 10 percent in 2004 - Share of banks’ direct lending to the equity market increased to about 6 percent of total credit from just slightly over 1 percent in 2004 - Indirect lending through personal loans could be higher - Macro-prudential indicators: - Capital-assets ratio (CAR) increased slightly to 17.4 percent - Ratio of nonperforming loans (NPL) to total loans declined to 8.3 percent and provisions were considerable - On an aggregate basis, banks complied with the CBU’s prudential norms - Maturity mismatches grew because lending for infrastructure and construction projects are long-term while average maturity of deposits is only three months - Banks have a substantial long dollar position; foreign exchange risk is limited by the government’s credible commitment to a dollar peg; non-dollar exposures are small ### Capital market regulations and supervision - Institutional responsibilities: - Central Bank of the U.A.E. (CBU): - Responsible for licensing and authorizing banks and non-bank financial intermediaries, including brokers and investment companies - Ministry of Economy (MOE): - Responsible for implementing the Company Law, corporate governance standards for issuers, prospectus disclosure requirements and the pricing of IPOs - Emirates Securities and Commodities Authority (ESCA): - Licenses intermediaries to trade on Abu Dhabi Stock Market (ADSM), Dubai Financial Market (DFM), and the Dubai Gold and Commodity Exchange (DGCX) - Abu Dhabi Stock Market (ADSM) and Dubai Financial Market (DFM): - Act as self-regulatory organizations, authorize firms to trade on their exchanges, set listing standards, and accept listings of public company securities *Italic: IMF staff compilation from the source text.* ### 7. The CBU’s licensing requirements for investment companies and brokers dates ### 7. The CBU’s licensing requirements for investment companies and brokers dates ### Licensing and legal framework - The CBU’s licensing requirements for investment companies and brokers dates from the mid-1990’s. - The corporate law follows a pattern established in the UK in the 1920s and contains provisions regarding capital structure that may hamper the development of publicly traded companies. - Examples of restrictive provisions: - New issues of equity securities require prior shareholder approval. - Shares can only be issued at a premium to their nominal value, regardless of current market price, with the consent of the MOE. - Beyond a licensing regime for investment companies, there is no framework in place to govern the formation and operation of or disclosure by collective investment schemes (CIS). ### Regulatory responsibilities and capacity - Responsibilities of regulatory agencies need clearer definition. - The law should give regulatory authorities clear powers to set and enforce comprehensive prospectus requirements and corporate governance standards for public companies. - Recommendation: Consolidate responsibility for licensing investment companies and brokers in one authority, which should also establish and enforce initial (prospectus rules) and continuous disclosure requirements for public companies. - As the ESCA’s capabilities improve, transfer responsibilities for securities oversight, including the regulatory role related to rules for IPOs and CISs, from the CBU to the ESCA. - All regulatory authorities should build sufficient capacity to ensure staff have the right skills to carry out their mandate effectively. - Although both the ESCA and the exchanges have investor education programs, the government should lend its support for an expansion of these programs. ### Collective investment schemes and statistics - Authorities need to develop and implement a comprehensive regime to govern the operations of CISs. - The CBU should begin collecting statistical information on mutual funds. ### IPO pricing, market access, and Company Law amendments - The MOE establishes the price of IPOs for both state-owned and private companies. - The price is set at the nominal value of the company’s shares rather than through an assessment of the company’s fair market value. - The MOE is also involved in the pricing of subsequent offerings by public companies and controls issuers’ access to the market by accepting or rejecting applications for issues by companies. - Consequences noted: prices are set artificially low, contributing to increased market volatility, unreasonable expectations of retail investors, and depriving enterprises of the full value they should obtain from funds raised in the capital market. - Recommended amendments to the Company Law: - Subscription prices for new offerings should be set by the market through professional underwriters based on an appropriate valuation of the company. - Intervention in pricing of subsequent offerings by currently listed companies should be restricted to a limit on the discount of the market price. - Rationing of subscription allotments may no longer be necessary once IPOs have been priced appropriately and according to the true value of the company. - Authorities should permit IPOs only for companies that have had audited balance sheets for at least two years. ### Public float, liquidity, and ownership concentration - Need to increase public floating of securities to promote deeper and liquid markets. - Definition: In a deep market, large blocks of stocks can be traded quickly without unduly affecting the market price. - Factors limiting liquidity in the U.A.E.: - Many public companies with significant numbers of shares outstanding have relatively few shareholders. - High government participation in ownership reduces shares available for trading. - Requirements forcing founding shareholders to subscribe to a significant portion of a company’s equity for long periods result in few shareholders holding significant numbers of shares outstanding. - Pre-emptive rights of existing shareholders to subscribe pro-rata on any new issue reduce opportunities for wider ownership. ### Institutional investor participation - Participation of long-term institutional investors in the securities markets is low. - Retail investors represent a very high percentage of investors in the U.A.E. market. - The estimated participation rate for retail investors varies from 60 percent to 90 percent of the market. - Impediments to market investments by insurance companies, collective investment schemes and pensions funds should be eliminated. - Institutional investors that have a limited need to liquidate securities to fund redemptions, such as closed-end funds, can provide additional stability in volatile markets. ### Market stabilization mechanisms and hedging instruments - Markets would benefit from introduction of market stabilization mechanisms, such as market maker mechanisms and hedging instruments, to provide liquidity and allow investors to manage risks more effectively. - Market maker mechanisms stand ready to trade securities if there are imbalances in offers to buy or sell, helping stabilize prices during significant buying or selling pressure. - The rules of the new DGCX require the appointment of market maker mechanisms. - The DFM and the ADSM should be encouraged to introduce the same. - ESCA should upgrade its staff capability to monitor such mechanisms effectively. - Development of exchange-traded hedging instruments such as options should be facilitated so that market risks can be managed more effectively. ### Margin lending and collateral practices - In the U.A.E., multiple margin rates are set for the same publicly traded security based on the nature of the loan. - Market value of securities is discounted by a percentage in recognition of volatility, but multiple margin rates are applied depending on the nature of the loan. - The discount applied is low, particularly for subscriptions for IPOs, where banks are permitted to lend up to five times the amount contributed by the borrower. - Note: Until 2005, this limit was 50 percent (that is, half the value of the purchase would have to be contributed by the subscriber). - Recommendations: - Replace multiple margin rates with a single rate for each class of securities, since risk in the value of collateral varies based on the nature of the collateral, not the loan. - Set the maximum loan value that can be given for most liquid traded stocks at 50 percent, similar to the margin rate in major international markets such as New York and London. - Consider a more conservative rate for less liquid stocks. - Introduce new rates incrementally to avoid a credit crunch and margin calls in the market. ### Corporate governance - Regulations on corporate governance need to be amended. - ADSM is consulting with market participants about a corporate governance code for listed companies. - Necessary resources need to be allocated to complete corporate governance initiatives on a priority basis. ### Dubai International Financial Center (DIFC) - The DIFC has established its own set of civil and commercial laws, courts, and an arbitration system built on the common law of the UK; only the criminal laws of the U.A.E. apply within the DIFC. - The Dubai Financial Securities Authority (DFSA) has entered into memoranda of understandings (MOU) with the UK’s Financial Services Authority, the U.S. Commodity Futures Trading Authority, and the ESCA in the U.A.E. - The DIFC is in discussions about entering into an MOU with the CBU. - Considerable progress has been made on the regulatory framework governing the DIFC, with an extensive set of laws created based on best international practices. - As of mid-February 2006, 160 companies and 40 financial institutions have been granted licenses to operate within the free zone. - The actual volume of business conducted at the DIFC is still small. - By design, DIFC operations are intended to be segregated from those of the financial markets in the rest of the U.A.E. - Banking operations are confined to institutional wholesale banking, with both deposit taking and lending in dirham prohibited. *Source: IMF staff report excerpt.* ### 19. In the event that some of the operations of the U.A.E. banks that are currently ### 19. In the event that some of the operations of the U.A.E. banks that are currently taking place in the domestic markets migrate to the DIFC ### Migration to the DIFC and supervisory coordination - Agreement between the two authorities (CBU and DIFC authority) should provide for information sharing arrangements and detail how the actual supervision, risk management and capital management of banks will be carried out. - The opportunity for financial innovations to exploit regulatory arbitrage and produce shifts of funds between the DIFC and the U.A.E will depend on the specifics of regulations and operations and will require careful monitoring. ### Key financial sector indicators (2001–2005) - Years: 2001 2002 2003 2004 2005 - Core indicators — Deposit-taking institutions: - Regulatory capital to risk-weighted assets 19.8 19.0 18.6 16.9 17.4 - Regulatory Tier I capital to risk-weighted assets 1/ 19.6 18.6 18.2 16.3 16.9 - Nonperforming loans net of provisions to capital 10.5 9.6 7.7 3.5 1.9 - Nonperforming loans to total gross loans 15.7 15.3 14.3 12.5 8.3 - Return on assets 1.9 1.9 1.9 2.1 2.7 - Return on equity 15.5 16.2 16.8 18.6 22.5 - Interest margin to gross income 73.7 69.9 59.5 64.6 49.3 - Noninterest expenses to gross income 34.0 38.7 43.6 40.3 26.9 - Liquid assets to total assets 31.8 28.1 22.7 23.2 26.9 - Encouraged indicators — Deposit-taking institutions: - Capital to assets 11.9 11.8 11.4 11.1 8.3 - Personnel expenses to noninterest expenses 30.3 31.6 29.5 38.6 41.8 - Customer deposits to total (non-interbank) loans 72 76 80 88 89 - Households: - Household debt to GDP 6.1 6.7 6.6 6.1 6.9 - Real estate loans to total loans 7.1 7.2 5.4 4.7 5.0 - Other indicators: - Loan loss reserves/non-performing loans 87 87.5 88.5 94.6 95.7 - Deposits as percent of M2 92.8 92.9 93.0 93.5 79.8 - Commercial banks loans to private sector as percent of total deposits 98.7 94.9 92.7 93.4 76.8 - Number of commercial banks (end-of-period) 46 47 47 46 46 - Number of banks with C.A.R. above 10 percent 46 47 47 46 46 - Spread between 3-month interest rate on local currency deposits and loans 4.7 5.6 5.1 4.9 5.0 - Maximum spread between 3-month local currency interbank rates for different banks (in basis points) 6.0 6.1 6.2 6.2 6.2 - Foreign currency deposits as percent of M2 22.6 23.4 24.4 25.8 28.1 - Foreign currency denominated lending/total lending 23.2 23.7 23.9 20.7 19.7 - Total expenses to total revenues 38.3 38.3 38.6 35.9 58.5 - Earning per employee (in millions of AED) 0.35 0.37 0.40 0.50 0.7 - Source for table: Central Bank of the United Arab Emirates - Note: 1/ BIS Tier I plus Tier II Capital (net of deductions). ### FSAP recommendations — status highlights - Banking Supervision - (1) Enhance supervision of groups with banks, insurance companies and securities firms by regular contact between CBU and other supervisors and assured access to prudential returns of insurance companies. Status: Still under discussion; dialog ongoing. - (2) Establish procedures within the CBU to pre-approve holdings exceeding 5 percent in listed banks; extend principle to non-listed banks. Status: Partial progress; no procedures for listed banks; draft banking law extends pre-approval to non-listed banks. - (3) Issue guidelines/circulars requiring banks to have policies for identification, measurement and control of market risk; introduce explicit comprehensive risk management requirements. Status: Informal progress only; CBU in third year of risk-based supervision examining credit, operational and market risk. - (4) Include off-balance sheet items and inter-bank exposures with maturities <12 months in definition of large exposures. Status: Not yet implemented. - (5) Protect staff reporting suspicious transactions in good faith from liability. Status: Completed; Federal Law no. 4 of 2002 Article 20 addresses this. - Securities - (1) Eliminate market confusion from ESCA delay. Status: Completed; ESCA is fully operational. - (2) Rationalize regulatory responsibilities of ESCA, CBU, MOE, and securities markets. Status: Groundwork laid; ESCA to gradually undertake more responsibilities as capacity builds. - (3) ESCA staffing exercise. Status: Good and ongoing progress. - (4) Electronic trading/clearing linkage between Abu Dhabi and Dubai exchanges. Status: Completed (electronic trading linkage in place; no clearing linkage; plans to merge exchanges; both settle on a T+2 basis). - (5) Develop corporate debt market and increase participation of nonbank financial institutions. Status: Progress is underway; ESCA to issue bond listing rules; regional committee established. - (6) Improve corporate governance including minority shareholder protections. Status: Not implemented. - Transparency - (1) Regulators should seek stakeholder inputs when contemplating changes. Status: Good progress; banks report good continual communication with CBU. - Legal reforms - (1) Amend companies legislation for minority shareholder rights and corporate governance; improve Company Register accessibility. Status: Progress underway; new banking law and new company law being drafted. - (2) Improve registration procedures for movable property and create mechanisms for non-possessory pledges. Status: Good and ongoing progress; registration procedures improved; no information on non-possessory pledges. - (3) Simplify law on ownership/transfer/charging of real estate and improve Land Registry. Status: Good and ongoing progress; foreigners now allowed to own land in Dubai; Land Registry freely available and fully accessible to the public. - (4) Enact amendments to Banking Law including AML provisions. Status: Good and ongoing progress; Federal law #4 of 2002 (anti-money laundering), Federal Law #1 of 2004 (combating financing of terrorism), and Federal Law #8 of 2004 (AML/CFT in the financial free zone) passed; work continues on new banking law. - (5) Consider accelerated/simplified procedure for small claims (e.g., claims under AED 50,000). Status: No progress. - Insurance - (1) Increase Insurance Division staff of MOE and appoint a U.A.E. Insurance Commissioner. Status: Some progress; ongoing hiring and training; creation of independent authority still envisioned. - (2) Full review of insurance law and regulations; formal study of capital requirements and investment risks for foreign branches. Status: Not yet implemented; gradual improvements and two Ministerial decrees issued. - (3) Review constraints inhibiting industry rationalization and rules on work visas for regional insurers. Status: Progress is unclear. - (4) Allow portfolio investment by foreign insurers to deepen local property and securities markets and permit joint ventures for life insurance. Status: Limited progress. - Payment system - (1) Review CBU overdraft procedures to lend only against proper collateral and consider publishing procedures. Status: Partial progress; lending still made without proper collateral but limited to reserves on deposit with CBU; loans for a maximum of six days with penalty interest of five percent over the three-month interbank rate; rules publicly disclosed in a circular on the internet; overdraft amounts not publicly disclosed. - (2) Greater automation and computerization; limit value of different transfer types in interim. Status: Completed; automation progressed, Telexes no longer used, all transfers electronic. - (3) Move to more advanced automatic system (increase capacity, reduce operational risk), consider same day settlement and assess RTGS introduction risks. Status: Good progress; automation and computerization expanded; Telexes no longer used. ### Recent developments (Statement by IMF Staff Representative, June 12, 2006) - New information does not change the thrust of the staff appraisal. - Recent economic developments: - During January-April, 2006, credit to the private sector increased by 10.8 percent and broad money increased by 8.1 percent. - At end-May, the U.A.E. increased diesel prices by 2.3 percent to 8.90 dirham ($2.43) per gallon. - Capital markets related issues: - As of June 7, the Abu Dhabi Securities Market (ADSM) and Dubai Financial Market (DFM), respectively, declined by about 41 percent and 62 percent from their peaks in November 2005. - In May, the CBU issued a circular requiring commercial banks to report their exposure to the equity markets and to provide full details on their outstanding loans to both institutional and individual investors. - In May, the CBU issued a circular increasing the ceiling for loans extended by banks against pledges of shares of companies operational for more than 5 years from 70 percent to 80 percent of the market value of these shares. - The cabinet approved new rules allowing companies to buy back up to 10 percent of their own shares (previously only if shares fell below book value). - The federal government is amending the Company Law to reduce the existing regulation requiring private businesses to float a minimum of 55 percent of their shares to become a public joint stock company down to 30 percent. - The authorities agreed to an FSAP Update to include a full assessment of the capital markets in the U.A.E; the legal regime of the Dubai International Financial Center and the Dubai Financial Service Authority; and developments in the banking sector. *Source: Central Bank of the United Arab Emirates; Statement by IMF Staff Representative, June 12, 2006.* ### 5. In April, the cabinet approved amendments to the Commercial Agency Law. The two ### 5. In April, the cabinet approved amendments to the Commercial Agency Law. The two ### Commercial Agency Law amendments - Two main amendments: - Setting the ceiling for ownership of nationals in publicly traded insurance companies at 75 percent. - Requiring the two stock markets, ADSM and DFM, to convert to public joint stock companies. - A decree was issued to form a committee to transform the DFM into a public joint stock company. ### Macroeconomic background and outlook - An outward-oriented development strategy and prudent financial policies supported: - Large accumulation of external financial assets. - Broadening and acceleration of liberal economic policies. - High levels of domestic and foreign investment in manufacturing, services, and real estate. - Medium-term growth prospects are favorable given strong fundamentals and pro-business policies. - Executive Directors: primary objective should be to ensure economic expansion proceeds at a sustainable pace while maintaining macroeconomic stability. ### Economic performance in 2005 - Real nonhydrocarbon GDP growth: 11 percent (preliminary data for 2005). - Hydrocarbon sector growth: 2.1 percent (preliminary data for 2005). - Growth was broad-based, with historically high rates in manufacturing, real estate and construction, and trade. - Inflationary pressures driven by: - Strength of domestic demand. - A hike in gasoline prices. - Significant increase in prices of non-tradables such as rents and services. - Equity markets: sharp correction since peaks in November 2005 due to market overvaluation and liquidation to fund IPO subscriptions; IPOs were in high demand due to a policy of underpricing them. - Broad money stock rise described in text as 34 percent, mainly on account of a rapid increase in private sector credit. ### Fiscal and external balances (2005) - Both the external current account and overall consolidated fiscal balances estimated to have recorded large surpluses in 2005: - External current account surplus: 14.7 percent of GDP. - Overall consolidated fiscal surplus: 26.9 percent of GDP. - Nonhydrocarbon deficit (excluding investment income) narrowed by 1.7 percentage points of GDP, to 17.3 percent. - Abu Dhabi budget improved markedly owing to high oil prices and moderate expenditure increases; workforce reduced by about 8,000 workers (14.5 percent) as services were outsourced. - Government entities’ investment plans (medium-term): - Total investment in Dubai conservatively estimated at $200 billion. - About $160 billion worth of projects planned for Abu Dhabi. - Over the next five to seven years, oil production capacity in Abu Dhabi expected to expand from 2.9 million barrels to 3.5 million barrels per day. ### Financial sector and capital markets - Banking sector remains strong, bolstered by effective supervision. - Capital-asset ratio increased slightly to 17.4 percent. - Ratio of nonperforming loans (NPL) to total loans declined; provisions were considerable, bringing the net NPL ratio below 2 percent. - Banks’ direct lending to the equity market increased to about 6 percent of total loans in 2005 from just slightly over 1 percent in 2004. - Regulatory challenges from fast-growing capital markets and nonbank financial institutions. - Considerable progress in regulatory framework for the Dubai International Financial Center; extensive set of laws enacted, benchmarked to best international practices. - Directors highlighted urgent need to: - Define responsibilities of entities regulating capital markets. - Address gaps in regulations and rationalize overlaps in responsibilities. - Undertake a full assessment of the capital markets regime against International Organization of Securities Commissions’ standards. - Recommended market enhancements: - Pricing of IPOs should be set by the market through professional underwriters based on appropriate company valuation. - Introduce market stabilization mechanisms such as a market maker system and hedging instruments. - Authorities agreed to undertake a Financial Sector Assessment Program update. ### Policy recommendations and supervisory measures - If rapid increase in private sector credit and inflationary pressure persist in 2006, much of the burden of tightening financial policies should fall on public spending. - Recommended fiscal policy and social measures: - Set spending in line with the economy’s absorptive capacity to maintain macroeconomic stability. - Link wage increases to gains in public sector productivity. - Replace subsidies on water and electricity with income-related payments to nationals below a certain income level. - Introduce legislation to reform the General Pension and Social Security System while it is running operational surpluses. - Start preparatory work for introduction of a Value Added Tax system at the federal level based on IMF Fiscal Affairs Department recommendations. - Monetary/credit tightening options (given fixed exchange rate and liberalized capital account): - Raise provisioning rates for credits carrying greater-than-average risks. - Increase the minimum amount of equity needed for approval of real estate and margin trading loans. - Tighten collateral requirements. - Gradual reduction of the percent at which individuals can borrow against their salaries could be considered. - Banking supervision: - Keep adequacy of prudential regulation under review. - Closely supervise banks with significant growth in profits from equity markets related activities. - Closely monitor banks’ direct and indirect exposure to real estate and equity markets and increased loan concentration in a few large business groups. - Labor, investment climate, and structural reforms: - Enhance investment climate beyond free zones and foster private sector participation. - Pass the amended company law to allow higher foreign investment in U.A.E.-based companies. - Implement labor policies flexibly to avoid undue pressures on private sector salaries and preserve competitiveness. - Address nationals’ employment via long-term education, training, appropriate wage policies, and labor legislation. - Statistics and transparency: - Strengthen institutional framework and build a strong, comprehensive, and consistent statistical system. - Compile data on off-budget fiscal operations and on domestic and external debt at the emirate level. - Enhance fiscal transparency at the emirates’ level by adopting international standards of classification for expenditure and revenue statistics. - Finalize the General Data Dissemination Standard (GDDS) metadata and nominate a GDDS coordinator. ### Selected economic indicators and key figures (2001–05) - Real GDP (at factor cost) annual percent change: - 2001: 1.7 - 2002: 2.6 - 2003: 11.9 - 2004: 9.7 - 2005 (Prel.): 8.5 - Hydrocarbon growth: - 2001: 0.0 - 2002: -7.6 - 2003: 13.6 - 2004: 2.9 - 2005 (Prel.): 2.1 - Non-hydrocarbon growth: - 2001: 2.5 - 2002: 7.7 - 2003: 11.2 - 2004: 12.6 - 2005 (Prel.): 11.0 - Consumer price index (annual percent change): - 2001: 2.8 - 2002: 2.9 - 2003: 3.1 - 2004: 5.0 - 2005 (Prel.): 8.0 - Investment (in percent of GDP): - 2001: 24.7 - 2002: 24.1 - 2003: 23.5 - 2004: 22.3 - 2005 (Prel.): 24.4 - Total revenue (in percent of GDP): - 2001: 37.0 - 2002: 42.0 - 2003: 41.3 - 2004: 42.5 - 2005 (Prel.): 49.4 - Hydrocarbon revenue (in percent of GDP): - 2001: 26.5 - 2002: 32.8 - 2003: 32.9 - 2004: 32.8 - 2005 (Prel.): 38.4 - Non-hydrocarbon revenue (in percent of GDP): - 2001: 10.5 - 2002: 9.2 - 2003: 8.4 - 2004: 9.7 - 2005 (Prel.): 11.1 - Total expenditure (in percent of GDP): - 2001: 37.4 - 2002: 31.6 - 2003: 28.3 - 2004: 24.3 - 2005 (Prel.): 22.5 - Current expenditure (in percent of GDP): - 2001: 30.0 - 2002: 26.4 - 2003: 22.9 - 2004: 20.7 - 2005 (Prel.): 18.5 - Consolidated fiscal balance (deficit -) (includes federal government and three largest emirates) (in percent of GDP): - 2001: -0.4 - 2002: 10.4 - 2003: 13.0 - 2004: 18.2 - 2005 (Prel.): 26.9 - Consolidated fiscal balance excluding investment income (in percent of GDP): - 2001: -5.0 - 2002: 7.1 - 2003: 10.0 - 2004: 13.8 - 2005 (Prel.): 21.1 - Excluding hydrocarbon revenue (overall balance excluding investment income and hydrocarbon revenue): - 2001: -31.5 - 2002: -25.7 - 2003: -22.9 - 2004: -19.0 - 2005 (Prel.): -17.3 - Change in broad money supply (in percent): - 2001: 15.3 - 2002: 15.6 - 2003: 16.1 - 2004: 23.2 - 2005 (Prel.): 33.8 - Change in private sector credit (in percent): - 2001: 8.8 - 2002: 11.3 - 2003: 13.5 - 2004: 24.7 - 2005 (Prel.): 44.5 - Exports (in billions of U.S. dollars): - 2001: 47.5 - 2002: 51.8 - 2003: 66.8 - 2004: 91.0 - 2005 (Prel.): 118.8 - Of which: Crude oil (in billions of U.S. dollars): - 2001: 17.6 - 2002: 16.6 - 2003: 22.1 - 2004: 29.6 - 2005 (Prel.): 43.5 - Imports, fob (in billions of U.S. dollars): - 2001: -33.5 - 2002: -37.5 - 2003: -45.8 - 2004: -63.4 - 2005 (Prel.): -80.8 - Current account balance (in billions of U.S. dollars): - 2001: 6.6 - 2002: 3.0 - 2003: 7.1 - 2004: 10.6 - 2005 (Prel.): 19.1 - Current account balance (in percent of GDP): - 2001: 9.5 - 2002: 4.1 - 2003: 8.1 - 2004: 10.2 - 2005 (Prel.): 14.7 - Central Bank reserves (in billions of U.S. dollars): - 2001: 14.3 - 2002: 15.3 - 2003: 15.1 - 2004: 18.6 - 2005 (Prel.): 21.1 - Central Bank reserves (in months of imports of goods and services): - 2001: 4.6 - 2002: 4.0 - 2003: 2.9 - 2004: 2.8 - 2005 (Prel.): 2.5 - Total external debt (in billions of U.S. dollars): - 2001: 19.4 - 2002: 16.7 - 2003: 16.5 - 2004: 22.6 - 2005 (Prel.): 36.5 - Total external debt (in percent of GDP): - 2001: 27.9 - 2002: 22.4 - 2003: 18.7 - 2004: 21.6 - 2005 (Prel.): 28.1 - Average real effective exchange rate (CPI based; in percent, appreciation +): - 2001: 4.1 - 2002: -1.3 - 2003: -6.9 - 2004: -4.5 - 2005 (Prel.): -0.7 *Public Information Notice (PIN) No. 06/76 — IMF Executive Board Concludes 2006 Article IV Consultation with the United Arab Emirates — July 12, 2006.* ### 4. Bolstered by higher hydrocarbon revenues and a prudent expenditure policy, the fiscal ### _cr06257 - 4. Bolstered by higher hydrocarbon revenues and a prudent expenditure policy, the fiscal ### Fiscal position - Consolidated fiscal balance posted a record surplus of 27 percent of GDP. - Non-hydrocarbon deficit narrowed steadily. - Expenditures declined as a proportion of GDP, with a diminishing share of current spending and accommodating increased investment outlays. - Nominal wage bill virtually stable over the past few years despite growing revenues; consolidated wage bill to GDP ratio declined in 2005 and this trend is expected to continue into 2006. - Efforts contributing to expenditure restraint: - Outsourcing non-core budget activities to the private sector. - Retrenchment of the size of the government. - Revenue-side measures: - Fund technical assistance on the introduction of a value-added tax (VAT) in the context of the Gulf Cooperation Council (GCC) to broaden the revenue base. - Institutional measures: - A macro-fiscal unit within the Ministry of Finance and Industry is being established, with some assistance from the Fund, to devise a consistent macroeconomic framework. - Budget classification aligned with the 2001 GFS standards. - Pursuit of measures to implement performance-based budgeting. - A stronger institutional anchor for harmonized fiscal accounting is likely to emerge within the context of the GCC monetary union. ### Monetary and exchange rate policies - Capital account fully convertible; monetary policy aims for a prudent credit stance to stabilize domestic liquidity and support the peg. - 2005 developments: - Substantial expansion in broad money induced by rapid growth in private sector credit. - Expansion partly tempered by implicitly tightened monetary conditions following sharp correction in equity markets and reversal of capital flows. - Central Bank of U.A.E. (CBU) substantially increased issuance of certificate of deposits to smooth domestic liquidity fluctuations. - Monetary policy continued to tighten, with the CBU successively hiking interest rates. - The three-month interbank rate increased from 2.4 percent in end-2004 to 4.7 percent in 2005, and currently stands at 5.14 percent. - Authorities contemplating additional measures, along lines proposed by staff, to further tighten monetary conditions if needed. - Pegged exchange rate regarded as a credible nominal anchor to anchor confidence in macroeconomic policies. - Oil price-induced appreciation does not appear to erode competitiveness given continued growth in the volume of non-oil exports. - Greater trade integration within the GCC context expected to alleviate potential appreciation pressures on competitiveness. ### Financial sector issues - Considerable progress achieved in financial sector reforms in line with staff recommendations. - U.A.E. positioning as a regional financial hub, building on Dubai’s diversification. - Banking sector remains strong and well capitalized, with sizable increases in profitability despite increased exposure to asset markets. - Considerable provisioning contributed to a net ratio for nonperforming loans (NPL) of less than 2 percent. - Banks’ exposure to the real estate market through household credit remains low; total household indebtedness remains modest. - Equity market developments: - Global increase in liquidity and buoyant oil prices drove surge in regional equity markets, including in the U.A.E. - Recent correction partly fueled by wave of Initial Public Offerings (IPO) in 2005 and early 2006 and associated liquidation to finance IPO subscriptions. - Authorities intend to refrain from market intervention but will exercise vigilance regarding future movements in equity prices. - Regulatory and supervisory actions: - Need for a national supervisory framework to regulate capital markets; authorities in general agreement with staff’s detailed recommendations outlined in Box 4. - Authorities will undergo a full assessment of the capital market regime against benchmarks established by the International Organization of Securities Commission (IOSC) by end-2006. - A mission to assess the legal framework of the Dubai International Financial Center (DIFC) and procedures of the Dubai Financial Services Authority will take place concurrently with the IOSC assessment to identify supervision gaps and overlaps and to assess links of the DIFC with the broader economy. ### Structural policies - U.A.E. ranks favorably on indices of competitiveness and business climate indicators. - Outward-oriented and streamlined regulatory environment has increased attractiveness for foreign direct investment (FDI). - Investment and trade agreements with major trading partners contributed to surge in FDI inflows and exceptionally high growth rates in recent years. - Double taxation treaties have encouraged activities of U.A.E. investors overseas. - Labor market policy: - Authorities committed to flexible implementation of the Emiratization policy to safeguard private sector competitiveness. - Strategy to enhance employability of nationals relies on human capital accumulation and active labor market policies to align skills of the national labor force with private sector demands. ### Statistical issues - Progress achieved in addressing structural weaknesses in the statistical database. - Population census completed; results expected to be released by year-end. - Census expected to provide backbone for gathering data on other sectors, including the real sector. - Household budget survey expected to be concluded by end-2006 to inform improvements to the consumer price index (CPI). - Several experts recruited to strengthen statistical capacity at the Ministry of Economy and Planning (MEP). - Coordination ongoing between the CBU and the MEP to advance the request for Fund technical assistance on the CPI. *Source: _cr06257 - 4. Bolstered by higher hydrocarbon revenues and a prudent expenditure policy, the fiscal* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06257.pdf_