Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with United Arab Emirates
IMF News, February 17, 2010
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- Published: February 17, 2010
Background
- PIN No. 10/20: On February 3, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with United Arab Emirates.
- The U.A.E. was adversely affected in 2009 by the global economic slowdown, shutdown of international capital markets, and the mid-2008 bursting of the Dubai property bubble.
- A renewed shock occurred when Dubai World (DW) announced in late November 2009 that it would seek a debt standstill through May 2010, including on bonded debt owed by Nakheel. Market tensions eased after DW paid the Nakheel bond on time in December with financial support from Abu Dhabi, but uncertainties remain regarding Dubai’s debt restructuring and the operational restructuring of government-related entities (GREs).
Economic developments and outlook
- Overall real GDP is estimated to have contracted by about ½ percent in 2009.
- Hydrocarbon GDP declined by 6¼ percent in 2009.
- Nonhydrocarbon growth, which had averaged 8 percent in the three previous years, is estimated to have slowed to about 1 percent in 2009.
- Diverging emirate performance: Abu Dhabi sustained growth via public sector investment spending; northern emirates (in particular Dubai and Sharjah) experienced declines owing to the property bubble burst and contraction in world trade.
- Consumer inflation: after peaking at about 12 percent in 2008, annual consumer inflation declined to about 1 percent in 2009.
Fiscal and external positions
- External current account balance is estimated to have shifted to a deficit of 2.7 percent of GDP in 2009—the first deficit in decades.
- Hydrocarbon export revenues dropped by about 45 percent in 2009 as a result of OPEC-mandated production cuts and lower prices.
- Imports fell by 22 percent in 2009 owing to a sharp contraction in consumer goods imports despite large public infrastructure projects in Abu Dhabi.
- Consolidated fiscal position: estimated at a virtual balance in 2009, following a surplus of 21 percent of GDP in 2008.
- Both oil and non-oil revenues fell in 2009; spending increased by about 14 percent.
- The nonhydrocarbon deficit widened by about 7 percentage points to 34 percent of non-oil GDP in 2009, owing mainly to higher outlays by Abu Dhabi on strategic projects.
- Reopening of capital markets in Q2 2009 and external borrowing, particularly by Abu Dhabi entities, helped stabilize international reserves by end-2009.
Monetary, credit, and banking developments
- Broad money growth slowed from 19 percent in 2008 to 10 percent in 2009.
- Real credit to the private sector was flat in 2009 as demand weakened and commercial banks adopted a more cautious approach.
- Credit was redirected towards public sector enterprises; banks increased holdings of central bank CDs.
- Authorities implemented measures, including recapitalization, to maintain confidence in the banking system.
- Capital adequacy ratio of national banks increased from 13 percent to 18 percent in half a year.
- Authorities are working to tighten the regulatory framework by introducing a general provision for unclassified loans, standardizing loan classification, and enforcing provisioning standards uniformly.
Executive Board assessment and policy recommendations
- Directors commended the U.A.E. authorities for decisive responses to shocks from the global financial crisis, lower oil prices, and the Dubai bubble.
- Directors noted that the DW announcement of a six-month debt standstill raised important challenges.
- Growth prospects remain favorable given underlying strengths, but authorities should embark on a more balanced and sustainable growth path over the medium term.
- Debt restructuring recommendations for DW:
- Seek a speedy, orderly, cooperative, and predictable approach.
- Enhance transparency and information disclosure.
- Ensure comparability of treatment among creditors.
- Accompany debt restructuring with vigorous operational restructuring of GREs, including formulating exit strategies for nonviable corporations.
- Financial sector recommendations:
- Articulate a plan for dealing with potential increase in loan losses.
- Press ahead with introducing general loan provisions, enforcing more uniform provisioning and loan classification standards, and further strengthening capital buffers.
- Use macroprudential policies increasingly over the medium term; consider countercyclical solvency and liquidity measures and closer monitoring of systemically important banks.
- Assess corporate governance and develop a federal insolvency law.
- Fiscal and institutional recommendations:
- Continue recent initiatives to improve federal policy coordination (Fiscal Coordination Committee, multi-year expenditure plans, debt management units).
- Rationalize investment decisions at the federal level and respond flexibly to global uncertainties.
- Given monetary policy limitations, fiscal policy should continue to play an important role in supporting activity.
- Continue increasing transparency of economic and financial data, including financial accounts and business strategies for GREs, and improve corporate governance to facilitate access of viable GREs to capital markets.
- Adopt the Federal Statistics Law and establish the National Bureau of Statistics; develop an action plan with implementing regulations and strengthen the Board’s operational independence.
- Pursue compilation of consolidated fiscal statistics and develop leading indicators and the U.A.E’s international investment position, in line with GDDS initiatives.
Selected macroeconomic indicators (2005–10) — key figures preserved as reported
- Nominal GDP (in billions of AED): 2005: 492.7; 2006: 601.3; 2007: 762.3; 2008: 959.8; 2009: 845.6; 2010: 909.6
- Nominal GDP (in billions of U.S. dollars): 2005: 134.2; 2006: 163.7; 2007: 207.6; 2008: 261.4; 2009: 230.3; 2010: 247.7
- Real GDP (at factor cost) (annual percent change): 2005: 8.2; 2006: 8.7; 2007: 6.1; 2008: 5.1; 2009: -0.7; 2010: 0.6
- Real oil and gas GDP (annual percent change): 2005: 1.6; 2006: 6.5; 2007: -2.7; 2008: -6.3; 2009: 2.7
- Real non-oil GDP (annual percent change): 2005: 10.8; 2006: 9.5; 2007: 9.1; 2008: 6.3; 2009: 1.0; 2010: 0.0
- CPI inflation (average): 2005: 6.2; 2006: 9.3; 2007: 11.6; 2008: 11.5; 2009: 1.5
- Public finances (in percent of GDP) — Revenue: 2005: 41.4; 2006: 49.7; 2007: 43.4; 2008: 46.9; 2009: 34.6; 2010: 39.7
- Hydrocarbon revenue (percent of GDP): 2005: 31.0; 2006: 38.2; 2007: 30.9; 2008: 37.7; 2009: 25.7
- Nonhydrocarbon revenue (percent of GDP): 2005: 10.3; 2006: 12.5; 2007: 9.2; 2008: 8.9; 2009: 8.8
- Expenditure and net lending (percent of GDP): 2005: 21.2; 2006: 21.9; 2007: 26.4; 2008: 34.2; 2009: 29.8
- Budget balance (percent of GDP): 2005: 20.2; 2006: 28.5; 2007: 21.5; 2008: 20.5; 2009: 0.4; 2010: 9.8
- Nonhydrocarbon balance (percent of nonhydrocarbon GDP) 2/: 2005: -16.5; 2006: -13.7; 2007: -14.2; 2008: -27.1; 2009: -33.7; 2010: -29.7
- Monetary sector (annual percent change) — Credit to private sector: 2005: 44.5; 2006: 36.9; 2007: 40.1; 2008: 49.3; 2009: 1.9; 2010: 0.5
- Broad money (annual percent change): 2005: 33.8; 2006: 23.2; 2007: 41.7; 2008: 19.2; 2009: 9.7
- External sector (in billions of U.S. dollars) — Exports of goods: 2005: 115.4; 2006: 144.6; 2007: 179.1; 2008: 239.8; 2009: 163.0; 2010: 182.3
- Oil and gas exports (in billions of U.S. dollars): 2005: 53.2; 2006: 69.1; 2007: 74.3; 2008: 102.7; 2009: 56.8; 2010: 71.8
- Imports of goods (in billions of U.S. dollars): 2005: -74.5; 2006: -88.1; 2007: -132.1; 2008: -176.3; 2009: -137.2; 2010: -135.1
- Current account balance (in billions of U.S. dollars): 2005: 22.7; 2006: 36.2; 2007: 19.5; 2008: 22.2; 2009: -6.2; 2010: 18.1
- Current account balance (in percent of GDP): 2005: 16.9; 2006: 22.1; 2007: 9.4; 2008: 8.5; 2009: 7.3
- Gross official reserves (in billions of U.S. dollars): 2005: 21.3; 2006: 28.0; 2007: 77.9; 2008: 29.9; 2009: 39.5
- Reserves, in months of next year imports of goods and services: 2005: 2.3; 2006: 2.0; 2007: 4.3; 2008: 2.2; 2009: 2.1; 2010: 2.4
- Real effective exchange rate (2000=100): 2005: 96.0; 2006: 101.2; 2007: 103.6; 2008: 107.5; 2009: 121.5
Source: IMF Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with United Arab Emirates, February 17, 2010.