IMF raises UAE 2014 growth forecast, warns against property bubble


Statement at the Conclusion of the January 2014 IMF Staff Visit to the United Arab Emirates

An International Monetary Fund (IMF) mission led by Harald Finger visited the United Arab Emirates during January 22-30 to review macroeconomic and financial sector developments. The mission met with H.E. Sultan Bin Nasser Al Suwaidi, Governor of the Central Bank of United Arab Emirates; H.E. Younis Haji Alkhoori, Undersecretary, Ministry of Finance; other senior government officials, and representatives from the business and financial community.

At the conclusion of the visit, Mr. Finger issued the following statement today in Abu Dhabi:

“Economic growth in the United Arab Emirates is expected to remain strong. The economy is estimated to have grown by 4½ percent in 2013, supported by tourism, hospitality, and real estate. The real estate sector in particular has seen a steep recovery, with prices in the Dubai residential real estate market having increased rapidly in selected areas. We expect real GDP growth to remain firm at 4½ percent this year, driven by ongoing momentum in the non-oil economy. By contrast, further growth in oil production could be limited in the context of an amply supplied global oil market. Inflation is expected to increase moderately, driven by rising rents.

“Looking ahead, growth in the coming years will benefit from a number of megaprojects and Dubai’s successful bid for the Expo 2020. The total cost, pace of execution, and financing of the new megaprojects remain uncertain. If not implemented prudently, these projects could exacerbate the risk of a real estate bubble. Moreover, these projects may create additional financial risks for Dubai’s government-related entities (GREs) and the banking system in light of the still considerable debt overhang from the 2009 crisis.
“Fiscal policy adequately continues to unwind the large expansion that was put in place in the wake of the 2008/9 global financial crisis. The budget execution of the federal and emirates governments for the first nine months of 2013 was broadly in line with spending plans. The increase in Dubai’s real estate registration fees from 2 to 4 percent last October was a welcome step in addressing speculation in the real estate market, and further increases could be contemplated in case the pace of price increases does not abate sufficiently. While 2014 budgets for some emirates are not yet available, we understand that the trend of consolidation is planned to continue this year.

“Newly implemented regulations on loan concentration and real estate exposure for banks will help protect the soundness of the banking system, which has remained amply capitalized and liquid. The new loan concentration limits will help contain risks to banks’ balance sheets in the context of the newly planned megaprojects. It will now be important to agree, as planned, on transition paths for banks that are currently not meeting the new limits. The new maximum loan-to-value ratios for mortgage lending will provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market. Looking ahead, the Central Bank could consider further tightening these rules if price increases in the real estate market remain very large.”


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