Transcript of a Conference Call on the Publication of the Staff Report for the 2013 Article IV Consultation with the United Arab Emirates

July 30, 2013

Harald Finger, Mission Chief for UAE
Simonetta Nardin, Communications Department
Washington, D.C.
Tuesday, July 30, 2013

MS. NARDIN: Good morning and thank you all for joining this conference call on the publication of the 2013 Article IV staff report for the United Arab Emirates. With me, here in Washington today, is the Mission Chief for the UAE, Harald Finger.

MR. FINGER: Good morning and good afternoon. Thanks for joining us. As Simonetta said, we have just completed the 2013 Article IV consultation with the United Arab Emirates -- and I thought I'd introduce it with a few remarks.

To give you some background of the economic context: the non-oil economy in the UAE has been gathering strength, amid favorable oil prices and capital inflows. We expect nonoil growth of 4.3 percent in 2013, which is an acceleration from last year. Growth has primarily been driven by the services sector.

Let me just mention the real estate market as one example, as it has started to recover from the 2009 crisis -- and in some segments, very rapidly.

As an illustration, in June, Dubai's average listed property sales price was up 35 percent year-on-year, according to information from one of the commercial banks.

Growth in oil production, on the other hand, will likely slow, in our assessment, in the context of an amply-supplied global oil market. We're projecting 2.1 percent growth in oil production this year, after growth of more than double that last year.

With this, overall GDP growth will slow down this year to 3.6 percent in our projection. But it's important to note that this really masks an upbeat assessment of nonoil growth that is underlying it, and supporting it, and which, as I said, we expect to strengthen this year.

Now looking ahead, as you know, there have been a number of announcements of new mega-projects in real estate and in tourism that are supporting confidence and growth -- but they also call for a prudent implementation and prudent economic management, in order to prevent a possible buildup of a renewed boom-and-bust cycle in the UAE.

There are also some external risks that we are focusing on, including a stronger-than-expected slowdown in emerging markets, which could affect oil prices -- and, through that, fiscal and current account balances. It could also affect lower non-oil export growth, and could affect tourism and foreign real estate demand.

Another risk we're focusing on is a possible reemergence of global financial stress. For example, if the policy commitments in the euro area are not delivered as planned, such a scenario could then affect the government-related entities (GRE), through their rollovers and through higher cost of their refinancing. The global financial market correction that we saw in May and June has just reminded us how quickly the market sentiment can turn, and so we do think that it is important to keep an eye on this risk, as well.

In light of these risks, we think that the UAE should focus in the period ahead on strengthening its fiscal and external buffers, and to bolster the important sectors of the government-related entities and the financial sector.

On the fiscal side, the UAE plans for continued consolidation in its fiscal accounts this year. It'll help it to further unwind the fiscal stimulus that was implemented in past years, following the 2008/2009 crisis.

The federal and Emirates’ budgets point to a consolidation in the non-hydrocarbon primary balance of around two percent of non-oil GDP. This is a pace that we think is appropriate, that will not undermine the economic recovery at this point in the cycle.

Consolidation will strengthen particularly the resilience of Dubai, which continues to carry substantial debt -- which we estimate at $142 billion. That amounts to 102 percent of its GDP. And that number accounts for the government and the government-related entities together.

Turning, then, to the government-related entities, their debt over the past year increased -- in our estimates -- to $93 billion. That's up from $84 billion the year before. And of this, $60 billion will fall due between now and 2017, highlighting the rollover risk I mentioned earlier.

Building on recent progress in restructuring the debt of the government-related entities, Dubai should continue to focus on strengthening that sector. That should include proactive management of upcoming debt maturities and, also, improving the government-related entities' transparency and governance.

And, again, the new mega-projects that I mentioned should be executed at a measured pace and in a way such that new risk-taking by the government-related entities is avoided.

On the financial side, the banking system maintains significant capital and liquidity buffers. That's a key strength of the system. And to preempt the buildup of possible new vulnerabilities, we think it is important now to swiftly implement the planned new prudential regulations, both concerning mortgage lending and loan concentration to government-related entities and local government.

These measures, then, will help mitigate the risk of rapid expansion of real estate lending and, also, of undue concentration of lending to the GRE sector.

I mentioned mortgage lending rules which will help on the banking side and will also help on the real estate side. But we have to factor in that real estate market is largely a cash market, and so mortgage lending rules should be complemented by other measures.

In particular, if the increase in housing prices that we've seen recently should continue unabated, then one should think about targeted increases in real estate-related fees and other measures to help address these risks.

So, with that, I would turn it over to you for questions and answers.

QUESTION: Hi, Mr. Finger. Thanks for doing this call. First, I just want to ask how exactly Dubai should execute this fiscal consolidation that you're talking about in this report. It seems that the primary recommendation is to raise fees on real estate transactions if the market kind of overheats, so to speak. And yet, then you go on to say that's not really practically something that the Dubai government wants to do; they said doing so would affect their competitiveness and so on and so forth.

And so it looks like they're going to raise salaries but sort of reduce capital spending. Is this really aggressive enough to deleverage the government situation?

MR. FINGER: It's important to note that fiscal consolidation is already underway in Dubai. They have taken measures in the last year and also this year to continue improving their fiscal position. And so that, we think, is an important part of the strategy, going forward, as well -- to continue along that road, to bring down the vulnerabilities.

We do think that a slightly faster pace of consolidation in Dubai would be helpful. We're illustrating the continued debt-related risks in Dubai in box four of our staff report, where we show that, on the baseline projection, the debt-to-GDP ratio is actually declining gradually over the medium term, but any substantial shock could turn that picture around, and lead to substantial increases, which would make economic management much more difficult for Dubai.

And so we think they're on the right track, but they could go slightly faster in order to improve things more rapidly.

QUESTION: So, there is visibility, at least, on how they plan to gradually repay these debts that are coming to you in the next X number of years?

MR. FINGER: For the Dubai government, with an improved fiscal position, these repayments will become more straightforward. I should mention that, next year, the Dubai government has a $20 billion maturity coming up to Abu Dhabi, and that maturity, we think, is something that Dubai would do well addressing quickly with Abu Dhabi, in a way that avoids market uncertainty and unnecessary speculation in the period ahead.

QUESTION: Is that going to be refinanced, do you think? I mean, does Dubai have the capability to repay it?

MR. FINGER: We don't want to speculate on the way these talks will go between now and next year. But we do want to stress the importance of settling this issue well ahead of time, and in a way that gives confidence and certainty to market participants.

QUESTION: Just to follow up on your comments about the rise in real estate prices in Dubai -- you mentioned that, according to one bank's estimate, listed property prices were up 35 percent in June, compared to a year earlier.

Is it correct to say, then, that -- I mean, to what extent is the Dubai property market starting to show signs of a bubble, and when would we get to that stage when it would risk overheating or forming a bubble?

MR. FINGER: Thanks. Yes, the number I quoted was 35 percent year-on-year, in June. If you look at that number, it looks high, but you have to take it into context. The Dubai property market has fallen by a lot since 2009, and what we've been seeing over the past year or so were quick increases in prices, but in terms of the price level, we're still well below where we were in 2007 or 2008.

And so in our assessment, it's too early to speak of a bubble now. At the same time, should Dubai's increases continue at this pace, you know, over time, there's certainly a risk that there would be a new bubble building up.

QUESTION: Similar to the earlier question -- you mentioned that if prices continue to rise, the government should look at imposing fees on real estate or otherwise intervening in the real estate market.

So far, has it shown any inclination to consider such measures? I know that Dubai officials have said that this time around they want to avoid excessive speculation. Are they preparing or at least considering such measures as we speak?

MR. FINGER: When we discussed the issue with the Dubai Department of Finance in May, they pointed out that it’s something that would need consideration and is complex to implement in part because of coordination issues with Abu Dhabi -- that they would not want to see their competitiveness eroded, and so it would make sense to coordinate such measures with Abu Dhabi. And so they were not immediately going ahead with this recommendation.

QUESTION: Hello, Mr. Finger. Thanks very much for your presentation.

I just wanted to ask about -- you mentioned in the report about this idea of intergenerational equity. And you talk about this as the gap that's opened up since sort of the fiscal spending in 2009.

And I just wanted to ask if you could just talk a bit about the importance of intergenerational equity, and how this gap has widened since 2009.

MR. FINGER: The concept behind this analysis is a reasonably simple one. It basically suggests that the oil wealth in the United Arab Emirates or, for that matter, in any country with a natural resource that is exhaustible -- that the country should make use of that oil wealth to spend some of it now, and save some of it for future generations -- so that you get a smooth pattern that is fair for future generations, as well.

We have run scenarios and estimates for the UAE, based on that concept, which is called the permanent income hypothesis model. And what we found is that right around 2009, when the UAE reacted to the large crisis that it faced, it increased its fiscal expenditure to levels that were going above that level that is fair, ensuring smooth path for future generations. They did so at that time with good reason -- because they had to deal with a crisis and the immediate effects of that.

But now, we see that, over time, it would be the right policy to go back towards that path of intergenerational equity, and we see that as something that is happening in the UAE now, as we illustrate in the report.

QUESTION: Okay. And what sort of timeframe would this be? What sort of timeframe were you looking at when you measured this?

MR. FINGER: Well, this is a very long-term model, basically taking a path throughout the horizon of the UAE's oil reserves and beyond that, in order to calculate a smooth path of consumption and expenditures.

QUESTION: A quick follow-up -- I'm remembering that, in 2010, the IMF, in its Article IV report, said Dubai's debt was at $109 billion, and now it's at $143, I believe.

I mean, isn't this fundamentally concerning? I mean, if back in -- three years ago, we were talking about how Dubai was at, you know -- dealing with excessive debt, and had all these problems, and now, three years later, has more debt -- you know, I mean, the debt doesn't seem to be going away. Isn't that sort of a fundamental concern, when you look at Dubai?

MR. FINGER: Thanks, yes, the debt levels in Dubai are still a source of concern. Relative to past reports, particularly the one in 2010, we would have changed our methodology slightly and included now also bilateral bank debt, particularly the large loan by Emirates NBD, which we list in our debt table in the appendix of the staff report. But yes, debt levels are still substantial and the sustainability analysis that we show in the report, particularly in box four, shows that there are still substantial risks on the Dubai side when it comes to government debt. And when it comes to the GREs, there are large maturities coming up between now and 2017, to the order of about $60 billion. And so these maturities will need to be managed well, in a proactive way, to avoid any resumption of concerns in the market.

QUESTION: So, what I take from this, really, is that we shouldn't compare this figure from 2010; it's not apples to apples.

MR. FINGER: Yeah, that is right. And I believe last year's report already had this number in, so you can go ahead and compare to last year's report.

MS. NARDIN: Thank you very much, this concludes our conference call on the Article IV consultation with the UAE.


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