United Arab Emirates: 2013 Article IV Consultation Concluding Statement of the IMF Mission

IMF News, June 11, 2013

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Bibliographic details

• Published: June 11, 2013

Introduction

• IMF mission visited the United Arab Emirates from April 30 to May 15, 2013, to hold discussions for the 2013 Article IV consultation.
• Discussions focused on:
  • pursuing appropriate near-term macroeconomic policies;
  • managing old and new risks stemming from Government-Related Entities (GRE);
  • pursuing policies to support financial sector stability.
• Mission team: Mmes. Arvai and ElGanainy, and Messrs. Behar, Finger (head), and Demirkol; Mr. Geadah, Alternate Executive Director, joined for part of the mission.

Recent Developments

• Economic recovery strengthened amid favorable oil prices and capital inflows; perceived safe haven status amid regional unrest supported capital flows.
• Real estate: stabilized in Abu Dhabi and started to recover in Dubai.
• GRE balance-sheet repair continued but remained incomplete.
• 2012 estimates and developments:
  • Economic growth estimated at 4.3 percent in 2012.
  • Hydrocarbon production expanded by around 5.2 percent.
  • Non-oil growth accelerated to 3.8 percent, driven by services.
  • External current account surplus rose to almost 17 percent of GDP in 2012.
  • Dubai’s non-hydrocarbon exports recorded high growth; bilateral trade with Iran declined by 31 percent year-on-year in 2012.
  • Inflation averaged 0.7 percent.

Economic Outlook and Risks

• Near-term projections and drivers:
  • Non-oil growth could reach 4.3 percent in 2013, underpinned by construction, real estate, and tourism-oriented sectors.
  • Oil production growth likely to slow to around 2 percent in 2013 after two years of substantial expansion.
  • Inflation could rise to around 2 percent in 2013 as housing recovers.
• Medium-term prospects:
  • Dubai plans megaprojects in real estate and tourism, including Mohamed bin Rashid City; World Expo 2020 bid could accelerate implementation.
  • Abu Dhabi expanding hydrocarbon capacity; diversification focuses on manufacturing, petrochemicals, aviation, renewable energy, and cultural tourism.
• Downside risks (described explicitly):
  • A global re-emergence of financial stress: reduced availability of international finance could hinder rollover of GRE and corporate maturing debt; some banks reliant on foreign wholesale funding might face liquidity pressures.
  • A deeper than expected slowdown in emerging markets, particularly in Asia, would weaken exports, tourism, and foreign real-estate demand.
  • A large and prolonged decline in hydrocarbon prices: would reduce fiscal spending and non-hydrocarbon GDP growth and could expose GREs’ and companies’ balance-sheet weaknesses despite substantial foreign assets and improving fiscal position.
  • Insufficient domestic policy reform leading to renewed boom-bust cycle: rising real estate prices and loose global liquidity could prompt imprudent risk-taking and re-leveraging by GREs and private companies, affecting banks due to strong interconnectedness with GREs.
• Upside risks:
  • Faster recovery in advanced economies and higher oil prices would support fiscal revenues and the external current account.
  • Adequate macroeconomic policies and borrowing restraint by GREs can support high and sustainable growth without undue macro risks.

Correcting Imbalances While Supporting the Economy (Fiscal Policy)

• Fiscal consolidation and outcomes:
  • Combined fiscal accounts posted consolidation of the fiscal stance by 3 percent of non-oil GDP, driven by Abu Dhabi and Dubai.
  • Salary increase for federal employees and increase in Abu Dhabi’s subsidies and transfers were more than offset by reductions in other outlays, including Abu Dhabi’s capital expenditure.
  • Overall fiscal surplus close to 9 percent of GDP in 2012.
  • Fiscal break-even oil price improved from $84 in 2011 to $74 in 2012.
• 2013 plans and appropriateness:
  • Continued fiscal consolidation of around 2 percent of non-oil GDP planned for 2013, driven by rationalization of capital spending and subsidies and transfers; spending on goods and services, defense and security, and the wage bill expected to increase.
  • Continued consolidation appropriate to correct long-term structural imbalance and improve fiscal break-even oil price to $71 in 2013.
  • Faster pace of consolidation in Dubai would be desirable to address debt-related risks; targeted increases in real estate-related fees could help.
• Medium-term and institutional developments:
  • Abu Dhabi and Dubai target gradual consolidation in non-oil balances through 2017.
  • Fiscal consolidation should be supported by reductions in energy subsidies to create fiscal space and improve energy efficiency.
  • Progress on medium-term fiscal frameworks (MTFF): federal medium-term budget adopted; Abu Dhabi developed a medium-term macrofiscal model; Dubai implemented a three-year budget framework. Recommendation to continue refining MTFFs and integrate Abu Dhabi’s model into budget formulation.
• Monetary stance:
  • Accommodative monetary policy under the peg to the U.S. dollar remains appropriate.
  • Low Central Bank of the UAE (CBU) interest rates help cushion fiscal consolidation impacts and support recovery in private-sector credit growth.
  • Level of the exchange rate remained broadly in line with fundamentals.

Managing Old and New Risks Stemming from GREs

• GRE debt and maturities:
  • Dubai total debt remains substantial at $142 billion (around 102 percent of GDP), of which $35 billion in government and government-guaranteed debt.
  • Dubai’s GREs increased debt to an estimated $93 billion, up from $84 billion in March 2012; about $60 billion falls due between 2013 and 2017.
  • Key maturities: $20 billion Dubai government debt to Abu Dhabi and the CBU related to the Dubai Financial Support Fund due in 2014; restructured debt related to Dubai World and Nakheel begin maturing in 2015/16.
  • Timely communication about key maturities important to support market confidence.
• Project execution and risk containment:
  • Dubai megaprojects to be executed largely through GREs; authorities should ensure gradual and flexible execution depending on demand.
  • New investments should be structured to strictly limit risk-taking by the highly indebted GRE sector.
  • Policy priorities: prioritize and sequence major projects, assess quality of planned spending, and improve frameworks for scrutiny, selection, delivery, and funding of major projects.
• Transparency and governance recommendations:
  • Abu Dhabi has improved monitoring and dissemination of GRE debt via its debt management office.
  • Data availability on Dubai GREs’ financial conditions, debt stocks, and maturity profiles remains inadequate.
  • Dubai should establish a full debt management office to implement a risk management framework covering identification, assessment, monitoring, and reporting of contingent liabilities from GREs.
  • Corporate governance improvements recommended for Dubai GREs:
  • delineate clearly commercial and noncommercial operations;
  • expand coverage of the 2009 corporate governance code to public companies;
  • strengthen role and independence of company boards;
  • improve risk management practices.

Financial Sector Soundness and Spillovers

• Banking system buffers and non-performing loans (NPLs):
  • CBU estimates NPLs may have peaked at 8.7 percent in December 2012.
  • Further GRE debt restructuring, including on already restructured debt, could add materially to NPLs.
  • Joint CBU/IMF staff stress tests indicate the domestic banking system could absorb significant increases in NPLs, with only a few banks falling somewhat below mandated minimum capital adequacy under an extreme shock.
  • Stress tests on non-resident liquidity withdrawal show a very large shock is required to generate even a moderate systemic liquidity need, within banks’ holdings of CDs and reserves at the CBU.
• Concentration and regulatory measures:
  • Banking system concentration risk to GRE and real estate sectors is significant due to strong interconnectedness and ownership/financial linkages.
  • Avoid rapid credit expansion and undue loan concentration to GREs to lessen risk of renewed boom-bust cycle and safeguard financial stability.
  • Implement planned mortgage lending regulation and loan concentration limits on GREs and emirate governments; agree gradual transition paths with banks that might initially exceed norms.
  • Mortgage regulations: caps on loan-to-value and debt-service-to-income ratios will help mitigate real estate risks; immediate effect limited due to cash-heavy residential market.
  • CBU should monitor mortgage-real estate interactions and tighten regulation or introduce new measures as needed.
• Macroprudential framework:
  • Strengthening macroprudential framework recommended, including enhanced financial stability mandate for the CBU.
  • Formal and transparent macroprudential institutional/policy framework should assign a mandate for financial stability, define coordination framework, objectives, analytical methods, and policy toolkit.
  • Adoption of the new Financial Services Law offers an opportunity to establish the legal base for improved macroprudential policy.
• Financial Sector Assessment:
  • A Financial Sector Assessment Program (FSAP) assessment is recommended to review sector strengths and weaknesses and strengthen the CBU's role as regulator and supervisor while facilitating financial sector development.

Improving Fiscal Coordination and Statistical Capacity

• Fiscal coordination:
  • Progress welcomed in information sharing among federal and emirate governments via the Fiscal Policy Coordination Council (FPCC).
  • Further strengthening recommended through improved fiscal information quality and coverage, improved macrofiscal analysis, joint budget and MTFF discussions, and enhanced expenditure policy coordination.
• Statistical capacity:
  • Authorities have made progress in consolidated government finance statistics.
  • Planned introduction of an international transactions reporting system at the CBU will strengthen balance of payments statistics.
  • Importance of maintaining momentum in strengthening economic statistics by resourcing improvements to national accounts and producing demographic and labor market statistics.
  • Compilation of the International Investment Position identified as essential to close an important gap.

Key Quantitative Indicators and Projections (selected from Table 1)

• Population: 8.3 million, nationals: 1 million.
• Per capita GDP-2011: $41,379.
• Unemployment rate: 4.2% (2009).
• Hydrocarbon sector exports (billions of U.S. dollars): 2011: 111.6; 2012: 118.1; 2013: 115.5; 2014: 116.0; 2015: 112.8; 2016: 110.6; 2017: 109.7; 2018: 109.9.
• Average crude oil export price (U.S. dollar per barrel): 2011: 109.6; 2012: 112.0; 2013: 108.1; 2014: 101.5; 2015: 97.3; 2016: 94.1; 2017: 92.0; 2018: 90.9.
• Crude oil production (millions of barrels per day): 2011: 2.6; 2012: 2.7; 2013: 2.8; 2014: 2.9; 2015: 3.0.
• Nominal GDP (billions of UAE dirhams): 2011: 1,280; 2012: 1,385; 2013: 1,420; 2014: 1,462; 2015: 1,519; 2016: 1,582; 2017: 1,654; 2018: 1,742.
• Nominal GDP (billions of U.S. dollars): 2011: 349; 2012: 377; 2013: 387; 2014: 398; 2015: 414; 2016: 431; 2017: 450; 2018: 474.
• Real GDP growth (annual percent): 2011: 3.9; 2012: 4.3; 2013: 3.6; 2014: 3.7; 2015: 3.8; 2016: 3.5; 2017: 3.4.
• Real hydrocarbon GDP growth (annual percent): 2011: 6.6; 2012: 5.2; 2013: 2.1; 2014: 3.1; 2015: 1.8.
• Real nonhydrocarbon GDP growth (annual percent): 2012: 4.2.
• CPI inflation (average): 2011: 0.9; 2012: 0.7; 2013: 2.0; 2014: 2.4; 2015: 2.5.
• Public finances (percent of GDP) — Revenue: 2011: 34.3; 2012: 35.7; 2013: 34.4; 2014: 32.9; 2015: 31.9; 2016: 31.3; 2017: 30.5; 2018: 29.7.
  • Hydrocarbon revenue: 2011: 28.2; 2012: 28.6; 2013: 26.9; 2014: 25.1; 2015: 23.7; 2016: 22.4; 2017: 21.4; 2018: 20.5.
  • Nonhydrocarbon revenue: 2011: 6.1; 2012: 7.1; 2013: 7.5; 2014: 7.8; 2015: 8.2; 2016: 8.9; 2017: 9.1; 2018: 9.2.
• Expenditure and net lending (percent of GDP): 2011: 30.3; 2012: 26.3; 2013: 25.8; 2014: 25.5; 2015: 25.3; 2016: 25.0; 2017: 24.5.
  • Current expenditure (percent of GDP): 2011: 19.8; 2012: 19.3; 2013: 19.1; 2014: 18.9; 2015: 18.5; 2016: 18.1.
  • Capital (percent of GDP): 2011: 10.0; 2012: 7.0; 2013: 6.0.
• Overall balance (percent of GDP): 2011: 4.1; 2012: 8.8; 2013: 8.1; 2014: 6.4; 2015: 5.5; 2016: 5.1.
• Non-hydrocarbon primary balance (excluding investment income) 1/ (percent of nonhydrocarbon GDP): 2011: -41.1; 2012: -35.2; 2013: -32.9; 2014: -30.6; 2015: -29.1; 2016: -27.8; 2017: -26.4; 2018: -25.2.
• Adjusted non-hydrocarbon primary balance 1/ 2/ (percent): 2011: -38.1; 2012: -34.9.
• Central government debt to banking system 3/ (percent): 2011: 17.4; 2012: 16.8; 2013: 17.0; 2014: 17.2; 2015: 17.3; 2016: 16.9.
• Monetary sector: Net foreign assets (percent): 2011: 17.7; 2012: 74.0; 2013: 15.6; 2014: 18.0; 2015: 22.7; 2016: 25.2; 2017: 19.5; 2018: 16.0.
  • Net domestic assets (percent): 2011: -4.2; 2012: 5.4; 2013: 1.7; 2014: 4.6.
  • Credit to private sector (percent): 2011: 2.3; 2012: 7.3; 2013: 7.2.
  • Broad money (percent): 2011: 5.0; 2012: 6.7; 2013: 7.7; 2014: 8.4.
• External sector (billions of U.S. dollars): Exports and re-exports of goods: 2011: 299; 2012: 347; 2013: 367; 2014: 393; 2015: 420; 2016: 453; 2017: 493; 2018: 542.
  • Nonhydrocarbon, excluding re-exports: 2011: 71; 2012: 96; 2013: 109; 2014: 120; 2015: 134; 2016: 151; 2017: 170; 2018: 193.
  • Imports of goods (billions): 2011: 191; 2012: 217; 2013: 241; 2014: 264; 2015: 294; 2016: 329; 2017: 369; 2018: 415.
• Current account balance (billions of U.S. dollars): 2011: 48.1; 2012: 63.4; 2013: 56.0; 2014: 55.2; 2015: 48.9; 2016: 45.0; 2017: 39.4; 2018: 35.3.
  • Current account balance (percent of GDP): 2011: 13.8; 2012: 14.5; 2013: 13.9; 2014: 11.8; 2015: 10.4; 2016: 7.4.
• External debt (percent of GDP) 4/: 2011: 39.6; 2012: 37.7; 2013: 37.8; 2014: 37.9; 2015: 37.5; 2016: 37.1; 2017: 36.6; 2018: 35.8.
• Gross official reserves (billions of U.S. dollars) 5/: 2011: 37.2; 2012: 47.1; 2013: 52.3; 2014: 59.7; 2015: 71.3; 2016: 87.8; 2017: 103.5; 2018: 118.8.
• Local currency per U.S. dollar (period average): 3.67.
• Nominal effective exchange rate (2005 = 100): 93.7 (2011); 98.1 (2012).
• Real effective exchange rate (2005 = 100): 102.4 (2011); 102.9 (2012).

Mission note on fiscal stance and definitions: The fiscal stance is defined as the consolidated non-hydrocarbon primary balance for the federal, Abu Dhabi, Dubai and Sharjah budgets including loans and equity but excluding (i) the operations of Dubai Financial Support Fund, (ii) Abu Dhabi government’s support for the real estate company Aldar in 2011, and (iii) the investment income from the sovereign wealth funds. The fiscal stance is expressed as a percentage of non-hydrocarbon GDP. The fiscal break-even oil price is the hypothetical oil price at which the fiscal accounts would be in balance. Banking system claims only for central government debt to banking system; external debt refers to foreign liabilities of the banking system only due to incomplete coverage of debt raised by non-banks in the international markets. The $93 billion GRE debt includes $11.7 billion bond issuance and syndicated borrowing by Dubai banks.

United Arab Emirates: 2013 Article IV Consultation Concluding Statement of the IMF Mission — June 11, 2013.

References

• United Arab Emirates and the IMF
• Mission Concluding Statements
• PRESS CENTER
• Article IV
• https://www.imf.org/en/home