UAE Finances Strengthening But Risks In Dubai Linger

The International Monetary Fund (IMF) indicated that the UAE’s economic recovery has continued to strengthen amid favorable oil prices and capital inflows. Growth is estimated to have reached 4.3% in 2012. Hydrocarbon production expanded by around 5.2%, and non-oil growth continued to accelerate to 3.8%, driven by growth in services sectors. Backed by high oil prices and production, as well as buoyant non-hydrocarbon exports, the external current account surplus rose to almost 17% of GDP in 2012. Dubai’s non-hydrocarbon exports, in particular, recorded high growth rates.

A broadening recovery in construction and real estate, and ongoing growth in tourism-oriented sectors are likely to underpin non-oil growth, which could reach 4.3% this year. Growth in oil production will likely slow to around 2% in 2013 after two years of substantial expansion, as growth in global demand remains weak amid expanding supply from international markets.

The UAE began last year to withdraw the large fiscal stimulus that was put in place in the wake of the 2009 crisis. The combined fiscal accounts of the federal and emirate governments posted a consolidation of the fiscal stance, driven by consolidation in Abu Dhabi and Dubai. For 2013, continued fiscal consolidation is planned. Fiscal consolidation is expected to be driven by a rationalization of capital spending and subsidies and transfers, while spending on goods and services, defense and security, and the wage bill are expected to increase. According to the Fund, a faster pace of consolidation in Dubai would be desirable to address the emirate’s continued debt-related risks. Particularly if risks of overheating in the real estate market rise, this could be supported by targeted increases in real estate-related fees, which would also help generate revenue in support of fiscal consolidation.

Dubai’s ambitious expansion plans warrant measured execution amid strengthening access to external financing in an environment of high global liquidity. Dubai’s megaprojects will be executed to a large extent through GREs. While further investment in the development of Dubai’s economy is commended by the IMF, the authorities should ensure that, in line with current intentions, execution will be gradual and flexible depending on demand. New investments should be structured in a way that strictly limits risk-taking by the still highly indebted GRE sector, as per the IMF. This will help contain fiscal risks and reduce the likelihood of another boom-bust cycle. Managing these risks thus calls for prioritizing and sequencing major projects, assessing the quality of planned spending, and for improving the framework to manage scrutiny, selection, delivery, and funding of major projects, as per the IMF.

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