IMF report on UAE focuses on policy mix

The IMF issued its latest country report for the UAE on April 13. The report links are here.

Some highlights:

From the external Article IV Consultation report:

The United Arab Emirates (U.A.E.) macroeconomic performance during 2007–08 was strong, with growth especially in the construction and services sectors and despite some slowdown in the last quarter of 2008, due to the global crisis. Annual average inflation accelerated, driven by domestic demand pressures (especially rents) and higher import prices (such as prices of food, building materials and skilled and unskilled workers). Higher oil prices contributed to large external current account and fiscal surpluses in both 2007 and 2008.

However, the outlook for 2009 and beyond has become more clouded, as the U.A.E. has been adversely affected by the turmoil in global financial markets. This is evident in a widening of sovereign risk spreads and a sharp downturn in stock markets—most pronounced for real estate companies. Large private capital inflows, driven by expectations of an appreciation of the dirham vis-à-vis the U.S. dollar, largely reversed over the summer of 2008; currency futures indicate that markets no longer doubt the peg. Foreign financing for many corporates has tightened, and a slowdown in real estate and construction seems underway. The global weakening will reduce demand for tourism, trade, and financial services, while lower oil prices may affect public spending. Growth in the non-oil economy is expected to slow down considerably, while inflationary pressures should recede.
...
The short and medium-term outlook is subject to a number of downside risks arising from the difficult global environment as well as domestic financial vulnerabilities in the wake of the recent real estate and credit boom (especially in Dubai). The main risks to the outlook stem from (i) a more severe global weakening; (ii) further tightening of foreign financing for investment projects; (iii) an increase in the demand for domestic financing adding to banks’ stress; (iv) a correction in the real estate market leading to a deterioration of asset quality in financial institutions; (v) a drop in oil prices that constrains the scope for fiscal policy to support growth; and (vi) an unexpected re-emergence of inflationary pressures.

From the IMF Staff Report:

Discussions focused on the policy mix needed to contain the impact of global turmoil, especially on the financial sector, and keep the U.A.E. economy on a path of sustainable growth with single-digit inflation.

The authorities

• Explained their approach is to preserve financial stability through various emergency liquidity facilities, guarantee of deposits, and a strengthening of banking supervision.
• Expect public spending to remain a key driver for growth in 2008–09, including through higher transfers to quasi-public entities to replace foreign and domestic bank lending.
• Agreed that the dirham might be moderately undervalued.
• Consider that the current pegged regime remains appropriate at this juncture, providing a strong anchor in the current turmoil.

Staff recommendations

• Slow credit growth while avoiding too abrupt a slowdown to avoid damage to corporates and the financial system. In the event of a worse-than-expected downturn, target contingency measures to safeguard systemically important institutions.
• The peg to the U.S. dollar remains appropriate unless inflation were unexpectedly to persist.
• Minimize fiscal costs of the government guarantees; ensure adequate incentives to prevent banks from using the new liquidity facilities to acquire more risky assets.
• Rationalize subsidies and prioritize investment projects with a view to alleviate supply bottlenecks and inflation pressures; be ready to pursue a more active counter-cyclical fiscal policy if needed.
• Complete ongoing work to disseminate monthly CPI data, establish a National Bureau of Statistics, and improve national accounts and public sector statistics, including preparation and publication of the IIP.

The Financial Times has a report.

Here is the link to the IMF staff report:

Published:	April 13, 2009
Electronic Access:		Free Full Text (PDF file size is 1,178KB)
Series:		Country Report No. 09/124