Transcript

Transcript of a Conference Call on United Arab Emirates

August 4, 2015

MS. UTSUNOMIYA: Thank you. Hello and thank you for participating in the conference call on the conclusion of the 2005 Article IV Consultation with the United Arab Emirates. I’m Keiko Utsunomiya, Senior Media Relations Officer at the IMF. The Staff Report and related documents have been circulated under embargoed until 11:00 a.m. Washington time which is about one hour from now.

With me today is Mr. Zeine Zeidane, Advisor of the IMF Middle East and Central Asia department and the mission chief for UAE. Also, Mr. Andre Santos, Senior Economist at the Middle East and Central Asia department, and he’s in the team that works on the UAE as well. This conference call is on the record and the content of the conversation is also under embargo until 11:00 a.m. Washington time. We’ll start with Zeine’s brief opening remarks follow by questions and answers.

MR. ZEIDANE: Thank you, Keiko, for organizing this. Welcome to all of you to this conference call. Let me first start by saying a few words about the Article IV for the 2015 Article IV consultation. Then we’ll give you the opportunity to ask questions after that.

I would like to start by saying we see the UAE economy as resilient thanks to large fiscal and external buffers. Thanks also to the safe haven status, but also to the great economy diversification supported by a sound business environment in the country. What is new this year is, as you know, lower oil prices followed by fiscal consolidation. Also, what is new is somehow a stronger dollar. Both of them are negatively affecting the economic outlook. As a result we revised non-oil growth downwards in our outlook in 2015 to 3.4%, as you’ve seen, compared to 4.8% in 2014 with almost unchanged headline number for growth because of high growth in the oil sector.

We see this year with the low oil prices, we see the first fiscal deficit since 2009. Estimated with our numbers with our forecast, oil price at around $60, $62 a barrel at 2.9%, but also if you look to the Staff Report you’ll see that every drop of $10 a barrel will lead to an increase of the deficit of 2.3% to 2.4%, so it might be a bit higher if oil prices remain here. So it could be something around 4% of GDP.

Also, we’ll still experience a sharp decline in the current account. Right now they are forecasted to go down from 13.7% to 5%, but it might be higher, but it might be lower than that. Also, in the same table you see what will be the factor for a drop of $10 a barrel on the economic front.

Our discussion with the authorities are focused on the three themes you’ve seen in the staff report, so first is a macroeconomic policy-mix, mainly focused on fiscal consolidation. Second theme, strengthening financial stability in the country, and the third theme, pursing economic diversification in the country. So let me focus for this conference call on these three items.

First, fiscal consolidation. We clearly support resuming fiscal consolidation as a country, and so we commend the authorities for that. Our advice is, however, to have a slightly slower pace to preserve economic growth, particularly in terms of capital spending. We want to preserve capital spending. Also, to focus broadly in terms of fiscal consolidation on reducing current spending. That means, basically, reducing subsidies and other transfers. Also, going forward, it is advisable to raise more nonhydrocarbon revenues, through new tax measures.

Coming to the question about subsidies, I know that many of you were very interested to get our feedback on that. We fully support the steps taken by the authority on this reform. As you know, that was our policy advice for many years for the country and in this Staff Report. I think the authorities did a great job this year by adjusting electricity to 35 the beginning of the year and by doing this fuel subsidy reform. These will provide some savings. We encourage the authority to push through adjusting electricity and also pursuing energy sector reform this year and in the medium term. That means possibly reforming gas subsidies that you’ve seen in the reports represent around 3% of the GDP in 2015.

The second theme we discussed with them was financial stability. As you’ve seen, the banking sector is resilient and could withstand severe shocks. We welcome the authority’s plan to strengthen regulation and supervision. We want to be very careful about liquidity risk with the slowdown in the deposit growth. Also, to continue to address the issues of loan concentration. At the same time, pursing also progress on GREs and strengthening the macro prudential framework will also be good steps.

The third theme is economic diversification. We want the growth to come from the private sector, so we want the authorities to continue strengthening the business environment, so opening up more for foreign direct investment with pushing ahead a new law on foreign ownership that will liberalize the foreign direct investment outside the free zone. But also improving the business environment, and at the same time, strengthening innovation, functioning of labor markets, education, and moving toward a knowledge-driven economy that is on top of the priorities of the region. We want them to continue to strengthen the environment of the private sector to take the lead in terms of growth going forward as they will continue to do fiscal consolidation.

So thank you, that’s on my side. Keiko will now open the floor for you and we’ll take your questions.

QUESTIONER: Good morning, gentleman. Thank you very much for taking the time to brief us. I read through the Staff Report, apologies, I couldn’t find the place where you mentioned, could I just check that the forecast for a fiscal deficit of 2.9% this year (inaudible) that reform.

MS. UTSUNOMIYA: Would you repeat your question please?

MR. TORCHIA: Right, sorry. The 2.9% fiscal deficit projection, what average oil price is that based on? Also, you mentioned that every $10 foreign oil increased the deficit by a certain amount, but I didn’t catch that. If you wouldn’t mind repeating that, please.

MR. ZEIDANE: Sure. So if you look to the table, Table 2, you have hydrocarbon sector at the beginning on top of the table. At the top of the table you see average crude oil export price, so it’s Page 25. See, I read through oil export price, and the forecast here is based on a price of $61.50 a barrel, okay? Do you see that?

QUESTIONER: Right.

MR. ZEIDANE: If you go down $61.50, you’ll see that in the second line of the table under 2015.

QUESTIONER: Oh, thank you I found it, yes. Thank you, very much. Yeah.

MR. ZEIDANE: $61.50. If you go down you will see that if you go to public finances, you will see the deficit here is -2.9%, and it is expected to bounce back to a surplus in 2016 of 0.2%. Then for the second point, you look to Page 9, okay?

QUESTIONER: Okay.

MR. ZEIDANE: You can look at the first row in the table after the title. So you see staff assessment, right? You see the sentence saying low oil price would reduce export earnings and fiscal revenue. That a $10 drop would reduce fiscal and external balances by 2 1/3 percentage points in two or three quarters?

QUESTIONER: I see it. Thank you very much. That answers my question.

MR. ZEIDANE: Sure. You’re welcome.

QUESTIONER: I just wanted to know with the latest move on the subsidies, do you think that could open up potential for other moves that might be imminent, like considering a tax? If they carry out these measures does that undercut the model that’s made the UAE, especially Dubai, successful, especially in non-oil sectors as being open to business tax free?

MR. ZEIDANE: Thank you very much. As you see in our Staff Report, we don’t expect any increase in taxes, so we don’t have any tax measures in the macro fiscal framework that we have right now. But that said, our policy advice is to continue to diversify revenue sources for the UAE. Any measures should be certainly preceded by an impact study that looks to what you are talking about. But again, if you look to the case of Dubai you already have CIT applicable to foreign banks and not to domestic banks, so that’s something we recommend to have a unified system without any discrimination between investors. We are recommending to move towards the CIT that is applicable to everybody, foreigners and domestic banks, but also to other corporates.

So they could do that in a very progressive way with a very low rate at the beginning, because the issue is not about the income. They have a lot of income coming from oil, but it’s also a way to start diversifying revenue, to put in place a tax administration, and to increase transparency in the economy overall. So it’s clear at this moment we don’t expect any fiscal measures, at least we don’t have any fiscal tax measure in our framework. But this is something we certainly advise them to move ahead with the VAT at the low rate and we advise them to also move forward with the CIT, so incorporating some tax applicable to all companies, not only foreigners, but foreign and domestic companies with also a very low and flat tax.

QUESTIONER: Okay. Thank you.

QUESTIONER: Two questions. Firstly, you said in the report, and just now, that the UAE plans to cut spending faster than the IMF recommended. What are your thoughts about the risks from doing that, and why did the IMF recommend cutting spending slower than the actual course of spending cuts the government decided on?

The other question is given energy subsidy reform, is there a danger that if the UAE moves ahead unilaterally with energy subsidy reform and that increases price differences between the UAE and Saudi Arabia or the Gulf neighbors that a risk from arbitrage, regulatory arbitrage companies moving to the Gulf neighbors to use cheaper inputs? Will that have a harmful on UAE business?

MR. ZEIDANE: For your first question, clearly what we support is resuming fiscal consolidation. Our recommendation is, however, that UAE has a lot of fiscal space due to its large fiscal buffers. What we see is that they are undertaking fiscal consolidation with a reduction in capital transfers to GRE and this is already having a negative impact on the economic outlook. So the quality of cuts matters and they should focus on doing a fiscal consolidation that preserves economic growth and using the fiscal space to do so.

With our policy recommendations, the budget deficit is able to come back to the level that is sustainable over the long run, but rather than doing it by 2022 as they will be doing themselves they could do it two or three years’ later. But at the same time, we want them to preserve strong economic growth to keep growth going and to keep improving the economic outlook over the short term. We consider they have enough fiscal policy space to do so.

Regarding the subsidy reform, you’re right, certainly it’s a good move. We hope that the other countries will move in line with the UAE. It certainly could raise some risk in terms of smuggling, in terms of loss of competitiveness to other countries. But again, as you’ve seen, the move also has an effect on lowering diesel prices in the country, and that’s something that would be of importance to the companies. Going forward, it’s also something that will strengthen the reputation of the country as a strong reformer. It will certainly improve its long term fiscal position, and reduce the cost of capital, which is something that firms will be considering with a lot of attention.

I would also want to say that compared to other countries, the prices were already very high. If you look at diesel prices often compared to Saudi Arabia, the difference is already very large, and actually they are reducing the difference rather than increasing the difference. The difference that makes the model in the UAE attractive is not about the level of subsidies, but rather about the competitiveness of the economy, the quality of the business environment. Other parameters are the large fiscal and external buffers that will be improved with these measures that are really creating the right incentives for the private sector to locate in the UAE.

QUESTIONER: Thanks.

MR. ZEIDANE: No more questions?

QUESTIONER: Hi, again. I’d like to ask a follow up question about the fuel price reform. Could I ask whether the reform announced at the end of last month, with the gasoline and diesel price changes, was that already factored into your projections for this year? Also, I’d like to ask, previously, you’ve estimated that petroleum subsidies cost the UAE about $7 billion a year. How much money do you think the UAE will save from the fuel price reform? In other words, have they removed subsidies completely so they would save all of the $7 billion or was it only a partial removal of subsidies, as far as you know?

MR. ZEIDANE: Thank you very much for this very interesting question. There are very many different estimates. So you have estimates before tax and after tax, so the $7 billion number is a number after tax. Across the range if you compare the prices in the UAE with the global prices including taxes and then that’s the number of $7 billion. Actually on gasoline, our estimate is something around $2 billion for the gasoline, without taxes, because there are no taxes in the UAE, so we compare something that is comparable to. As a team, we look to the global prices without, before taxes, and we compare them to the UAE prices. It’s something around $2 billion.

Today, our estimate of the gain is something that will be around 0.1% of GDP, taking into account the fact that the diesel prices are coming down with losses in terms of income. So overall, it is not something really very large as an impact for this year. But with the expected increase in prices we certainly could go up to 0.6% of GDP over the medium term, so it’s something that is expected to increase as a gain over the medium term. As I said, on average, because of the increase in gasoline and the decrease in diesel the impact on the five month will be something to $0.5 billion, so it’s not very large.

I would like also to say that we still have subsidies in electricity and in gas. The larger subsidy today is on gas. That is estimated around 3% of GDP. That’s also something they could certainly look into. I guess to do it they also need to make sure that their industry remains competitive. That’s something we encourage them to consider, but also to do in a very careful manner, not to hurt their competitiveness.

Does that respond to your question or do you still have something?

MR. ZEIDANE: Thank you very much. Thank you, all of you.

MS. UTSUNOMIYA: This will conclude our conference call.