INTERNATIONAL MONETARY FUND
MIDDLE EAST AND CENTRAL ASIA DEPARTMENT
UNITED ARAB EMIRATES
—
2012 ARTICLE IV CONSULTATION
CONCLUDING STATEMENT
March 1, 2012
An International Monetary Fund (IMF) mission visited the United Arab Emirates from
February 28 to March 14, 2012, to hold discussions for the United Arab Emirates’
2012 Article IV consultation.1 Discussions focused on: pursuing adequate near-term
macroeconomic policies; managing the ongoing risks stemming from Government-Related
Entities (GRE); bolstering confidence in the financial sector; and addressing regional
disparities between emirates. The mission would like to thank the authorities for the open and
fruitful discussions and for their hospitality.
Recent Developments
1.
Following the 2009 crisis, the economy has been slowly recovering and repairing its
balance sheets. The Dubai World debt restructuring was completed, but several other troubled
GREs are still in the process of restructuring. The authorities strengthened the banking sector
through liquidity support, recapitalization, and deposit guarantees, and the emirate of Abu Dhabi
provided financial support to the emirate of Dubai. The Dubai Financial Support Fund was
called to support troubled entities in the emirate and has now almost exhausted its funding of
$20 billion.
2.
The economic recovery continued in 2011. While the construction and real estate
sectors still remained subdued in the aftermath of the 2009 crisis, real GDP growth nonetheless
reached an estimated 4.9 percent, supported by high oil prices and production in response to
disruptions in Libya. Non-hydrocarbon growth also strengthened, to around 2.7 percent, backed
by strong trade and a buoyant tourism sector. In light of the supportive external environment,
the current account surplus increased markedly, to around 9 percent of GDP. Average inflation
remained subdued at 0.9 percent, largely due to declining rents.
3.
The recovery was supported by an expansionary fiscal policy. The non-hydrocarbon
primary deficit (including loans and equity) rose to nearly 42 percent of non-hydrocarbon GDP
in 2011 (from 36 percent in 2010), as Abu Dhabi increased its current and development
expenditures and its support for the ailing real estate sector. Nonetheless, backed by high oil
prices, the overall fiscal balance improved substantially.
4.
Supported by accommodative monetary policy, banks remained amply liquid but
private sector credit growth did not pick up. In light of low U.S. interest rates, monetary
policy stayed accommodative under the fixed exchange rate regime, which has continued to
serve the economy well. Lending to the private sector has nonetheless remained sluggish as
excess capacity in the real estate sector and the debt overhang still limit lending opportunities.
Despite a continued rise in non-performing loans, the banking sector has remained well-
1
The mission, comprising Mmes. Arvai and Minasyan, and Messrs. Finger (head), Prasad (all MCD), and Jonas (FAD) met
with H.E. Minister of State for Financial Affairs Obaid Humaid Al Tayer, H.E. Minister of Economy Sultan Bin Saeed Al
Mansoori, H.E. Governor of the Central Bank of United Arab Emirates Sultan Bin Nasser Al Suwaidi, the heads of economy
and finance departments of the emirates, as well as other senior officials and representatives from the business and financial
community. Ms. Koranchelian (SPR) and Mr. Kammer (MCD) joined for parts of the mission.
capitalized and profitable. In October 2011, the authorities quickly resolved Dubai Bank
through an arranged take-over by Emirates NBD.
Economic Outlook and Risks
5.
The recovery in non-hydrocarbon growth looks set to continue in 2012. Despite the
continued domestic deleveraging and the ongoing oversupply in the real estate market, real nonhydrocarbon GDP growth is projected to further strengthen to 3.5 percent, supported by buoyant
trade, tourism. With limited potential for further increases in oil production in light of
production levels already close to capacity and an expected partial recovery in Libyan oil
production, overall GDP growth is expected to moderate to 2.3 percent. Inflation is likely to
remain subdued at around 1 ½ percent.
6.
Downside risks to this outlook reflect the UAE’s reliance on hydrocarbon exports
and its close links with international markets:

A decline in oil prices in light of weak growth prospects in the advanced economies
would lower export earnings and fiscal revenues. While the UAE maintains significant
buffers in the form of international reserves and sovereign wealth fund assets, a
prolonged fall in oil prices would ultimately imply reduced fiscal spending and nonhydrocarbon GDP growth, and an adverse impact on asset prices. This would also
further expose vulnerabilities in GREs and private companies affected by the ailing real
estate sector.

A renewed worsening of global financing conditions could make it more difficult to
roll over some of the GREs’ maturing external debt, and would raise the overall cost of
their borrowing from international markets, thus further straining their balance sheets.
About $32 billion of sovereign and GRE debt is estimated to mature in 2012, of which
$15 billionin Dubai. Moreover, while the banking system has remained very liquid,
some individual banks, especially those that rely on wholesale funding, might face
liquidity pressures.

A more pronounced impact of the international sanctions on Iran could adversely
impact the UAE economy through a reduction in bilateral trade, real estate demand,
tourism, and financial services to Iran-based customers.

A pronounced economic slowdown in emerging Asia would affect trade, tourism, and
external financing conditions. Robust external demand from Asia has helped limit the
impact on the UAE of the European recession and of the international sanctions on Iran.
Moreover, increasing capital flows from Asia have dampened the effect of the European
financial sector deleveraging on UAE foreign funding conditions. While currently a tail
risk, the potential loss of Asian demand and capital flows could thus have a noticeable
impact on the UAE.
7.
There are also a number of upside risks to the outlook. Higher oil prices in the
context of heightened regional geopolitical tensions would further support fiscal revenues and
the external current account, as long as oil exports are not disrupted. Heightened regional
tensions could also lead to renewed safe-haven capital inflows and increased real estate demand.
Maintaining Macroeconomic Stability and Supporting the Economy
8.
Following last year’s fiscal expansion, the UAE plans to start consolidating its fiscal
accounts in 2012. The federal and emirate budgets imply a modest consolidation of the fiscal
stance by 0.5 percentage point as a substantial salary increase for federal employees and a large
increase in Abu Dhabi’s planned development expenditures are more than offset by reductions
in other expenditures and increases in non-tax revenues.2
9.
The planned fiscal correction is appropriate. The fiscal break-even oil price (the
theoretical oil price at which fiscal accounts would be in balance) has markedly increased in
recent years, from $23 in 2008 to $84 in 2012), exposing the UAE to the risk of falling oil
prices. Moreover, the non-hydrocarbon fiscal deficit exceeds levels consistent with
intergenerational equity. Prudent fiscal plans are also appropriate in light of the risk that further
funds may be needed to support ailing GREs. At the same time, the gradual pace of fiscal
consolidation implies that the fiscal stance is unlikely to undermine the economic recovery. The
recovery will also continue to be supported by an accommodative monetary stance under the
peg to the U.S. dollar.
10.
Both Abu Dhabi and Dubai plan to balance their fiscal accounts in the medium
term.

Abu Dhabi’s recently approved capital spending plan will be an important contribution
to supporting demand, but the projected large magnitude of the increase in development
spending suggests a need for careful project evaluation to ensure that spending is
productive. With the increase in development spending more than offset by other
savings, Abu Dhabi’s planned gradual fiscal consolidation (excluding last year’s support
for Dubai and Aldar) appears appropriate. Looking ahead, Abu Dhabi plans a continued
fiscal consolidation 2017.

Dubai’s continued fiscal consolidation is crucial for its medium-term sustainability given
fiscal risks posed by contingent liabilities related to GREs. In this light, the Dubai
government’s plans for fiscal tightening this year, and to bring the fiscal accounts close
to balance by 2014, are welcome.
11.
Several initiatives are under way to diversify the sources of government revenues
and to improve budgetary practices. The federal government works on an overhaul of
2
The fiscal stance is defined as the consolidated non-hydrocarbon primary balance for the federal, Abu Dhabi,
Dubai and Sharjah budgets including loans and equity but excluding (i) the operations of Dubai Financial Support
Fund, (ii) Abu Dhabi government’s support for the real estate company Aldar in 2011, and (iii) the investment
income from the sovereign wealth funds. The fiscal stance is expressed as a percentage of non-hydrocarbon GDP.
Abu Dhabi’s 2012 budget is not yet available; numbers are staff estimates.
multiple fees collected by federal ministries, also with a view to reducing the associated
collection costs. Technical preparations are under way for an eventual introduction of a value
added tax, which is under discussion at the GCC level. The authorities are also conducting an
economic impact study of a possible corporate income tax. Passage of the draft organic budget
law would help improve budgetary practices, as it mandates the preparation of a medium-term
expenditure framework for the federal government and requires the use of a treasury single
account for federal entities.
12.
Given the federal structure, effective intergovernmental coordination is key for
strengthening both short-term demand management and medium-term fiscal
sustainability. Information sharing on budgets and other aspects of public finances that can
create important spillovers is a key precondition for effective fiscal coordination. The mission
welcomes the progress made in information sharing, facilitated by the Fiscal Coordination
Council (FCC), for the federal and emirate governments, and encourages the authorities to
extend the information sharing to include the GREs. Looking ahead, it will be important to
extend the FCC’s work to the effective coordination of fiscal policy plans, including the joint
determination of aggregate revenue, expenditure, and financing plans in light of macroeconomic
and other policy considerations, and the breakdown of these goals into plans for the federal and
emirate level authorities. The IMF stands ready to provide technical assistance to support the
further expansion of the FCC’s activities.
Managing Risks Stemming from the GREs
13.
While substantial progress has been made, the GREs are still faced with
considerable risks. While the debt of some GREs has been restructured (including Dubai
World), the process has been more protracted in other cases, such as Dubai Holding. The total
debt of Dubai GREs is estimated to have declined marginally to US$76 billion in 2011 (from
$77 billion in 2010), while the debt of Abu Dhabi GREs rose to $99 billion (from $92 billion in
2010). Moreover, the GREs are still faced with high refinancing needs and continued reliance
on foreign funding. While they are increasingly managing their upcoming rollovers proactively,
the current uncertain global financial environment still constitutes a key risk.
14.
Improved transparency and communication would support the market refinancing
of GRE debt. The mission welcomes the progress made in improving the monitoring of GRE
borrowing and dissemination of information on GRE debt, particularly by Abu Dhabi’s debt
management office. However, more needs to be done to improve the availability of data on the
financial conditions, debt stock and the maturity profile of Dubai GREs. The Abu Dhabi
government has also disclosed the list of GREs it would support in case of financial difficulties,
while the Dubai authorities opted for a different approach, emphasizing to markets that the
government does not explicitly back any GRE obligations. In any case, increased transparency
and a proactive strategy for communicating with financial markets would help reduce
uncertainties and improve financing prospects.
15.
Looking ahead, local Emirates’ authorities should continue to improve regulation
and oversight to manage the remaining GRE risks. Impaired GREs’ balance sheets should be
cleaned, including, where needed, through debt restructuring. Further risk taking should be
contained within a proper risk management framework entailing effective identification,
assessment, monitoring, and reporting of contingent liabilities arising from GREs, and
disclosure of these liabilities in government accounts. A statement of contingent fiscal risks
should be prepared together with annual budget documents. Strengthening the GREs’ corporate
governance will also be important. This includes delineating clearly their commercial and
noncommercial operations, and standardizing the accounting, auditing, and financial reporting
practices.
Financial Sector Soundness and Financial Spillovers
16.
The banking system maintains significant buffers to address a further deterioration
in asset quality, though individual banks may be affected. From their pre-crisis levels in
2008, NPLs have already increased more than threefold in Dubai (to 10.6 percent) and Abu
Dhabi (4.6 percent) and will likely rise substantially further this year, including from the
ongoing restructuring of Dubai Holding, the potential restructuring of other maturing GRE debt,
and distressed real estate companies. Despite higher provisioning, profitability has been
maintained but will remain constrained by cautious credit growth and the ongoing provisioning
required to cover potential NPLs. The mission’s preliminary stress tests show that the domestic
banking system could absorb a significant increase in non-performing loans. Nevertheless, some
individual bankswith high loan concentration in the real estate sector may maintain fewer
buffers to deal with any shocks.
17.
The central bank has made significant headway in strengthening bank regulation.
The mission is encouraged by the CBU’s efforts to induce banks to further increase general and
specific provisioning and capital adequacy, including in some cases by restricting dividend
distribution, as there remain substantial amounts of restructured and renegotiated loans in the
banking system that could turn problematic in the future. Tailoring the CBU’s early warning
system to system-wide risks (including GREs, real estate) would be appropriate in this respect.
The mission also encourages the authorities to develop a formal macroprudential framework for
calibrating regulation from a systemic perspective.
18.
The CBU will continue to closely monitor the liquidity of individual banks and
encourage them to proactively manage liquidity risks. The funding structure of the banking
system has significantly improved since the 2009 crisis. Nonetheless, since last summer, as
earlier deposit inflows have partially reversed, banks have increased their liabilities to foreign
banks. Although the banking system has remained comfortably liquid, a foreign funding shock
may generate some foreign currency liquidity tightening in the banking sector, which needs to
be managed, in particular, at the individual bank level. The CBU mainly relies on certificates of
deposit to manage banking system liquidity and has started work towards creating a marginal
lending facility as a means of providing standing liquidity when needed. Looking ahead, the
implementation in the coming years of the Basel 3 liquidity norms should be supported by the
development of domestic money and bond markets. This would facilitate banks’ liquidity
management and eventually allow corporates to raise funding from domestic capital markets
19.
Shielding the banking system from further GRE risks will be key. In 2011, the net
exposure of the banking system to government and public institutions increased by
Dh 44 billion (3.5 percent of GDP). Some of these exposures are not consistently classified
across banks’ balance sheets and government fiscal accounts, which could lead to nontransparency in bank regulatory compliance. There is a risk that GREs could increasingly turn to
domestic banks for their funding needs in the period ahead in case they face difficulties in
external market financing. The mission stresses the importance of avoiding channeling bank
funding to non-viable GREs in order to maintain the integrity of the banking system. The CBU
should enforce the limits on bank exposure to individual GREs and could consider imposing
higher capital charges or forward provisioning on risky GREs. The planned introduction of
aggregate limits on bank lending to GREs would also be welcomed to contain banks’ risks from
GREs and should be introduced in a phased manner.
20.
Effective bank governance is fundamental to support financial sector soundness.
Although the central bank has issued corporate governance guidelines for bank directors, in
light of the government’s control of banks and the banks’ high exposure to GREs, a clear
governance framework is needed to safeguard the banks’ financial integrity. The mission
encourages the central bank to adopt the newly evolving international principles on governance
standards for banks and recommends conducting a bank governance diagnostic in the context of
the forthcoming Financial Sector Assessment Program.3
Improving the Statistical Capacity
21.
The mission stresses the importance of further improving the statistical capacity.
The authorities have made good progress in establishing databases and improving the quality of
economic statistics. The establishment of the National Bureau of Statistics and Debt
Management Offices were important steps in developing statistical capacity. Nevertheless, more
progress is needed towards harmonization of the compilation process and coordination among
respective statistics agencies across the Emirates, and towards improvement in methodologies
and timely compilation and dissemination of key statistics, including on balance of payments,
national accounts, and fiscal accounts.
3
The Financial Sector Assessment Program is a joint program of the IMF and World Bank. The World Bank can
assess bank governance upon the authorities’ request.
Table 1. United Arab Emirates: Selected Macroeconomic Indicators, 2008–17
(Quota: SDR 752.5 million)
(Population: 5 million, nationals: 1 million)
(Per capita GDP-2009: $53,477; poverty rate: n.a.; unemployment rate: 4.2% (2009))
2008
2009
2010
Est.
2011
Proj.
2012
Proj.
2013
Proj.
2014
Proj.
2015
Proj.
2016
Proj.
2017
Hydrocarbon sector
Exports of oil, oil products, and gas (in billions of U.S. dollars)
Average crude oil export price (in U.S. dollar per barrel)
Crude oil production (in millions of barrels per day)
103.0
96.3
2.6
68.1
74.6 111.6 122.1 118.4 112.9 108.7 106.2
62.8
77.0 109.6 119.7 115.0 107.8 102.2
98.3
2.3
2.3
2.6
2.6
2.6
2.6
2.7
2.7
(Annual percent change, unless otherwise indicated)
105.3
96.0
2.8
Output and prices
Nominal GDP (in billions of AED)
Nominal GDP (in billions of U.S. dollars)
Real GDP
Real hydrocarbon GDP
Real nonhydrocarbon GDP
CPI inflation (average)
1,156
315
5.3
1.6
6.3
12.3
993
270
-3.3
-9.9
0.6
1.6
1,576
429
3.6
1.8
4.5
1.9
1,646
448
3.7
1.9
4.5
2.1
1,093
298
0.9
-1.5
2.1
0.9
1,323
360
4.9
9.2
2.7
0.9
1,419
386
2.3
0.0
3.5
1.5
1,449
394
2.8
1.0
3.8
1.7
1,480
403
3.3
2.0
4.0
1.9
1,520
414
3.5
1.9
4.2
1.9
(Percent of GDP, unless otherwise indicated)
Investment and saving
Gross domestic investment
Change in stocks
Total fixed capital formation
Public
Private
Gross national saving
Public
Private
Public finances
Revenue
Hydrocarbon
Nonhydrocarbon
Expenditure and net lending
Current
Capital
Overall balance
Non-hydrocarbon primary balance (excluding investment income) 1/
Adjusted non-hydrocarbon primary balance 1/ 2/
Central government debt to banking system 3/
22.5
1.3
21.2
7.4
13.8
30.1
24.3
5.8
23.9
1.6
22.3
9.1
13.2
27.1
4.5
22.7
25.3
1.5
23.8
8.6
15.2
28.5
7.6
20.9
22.4
0.0
22.4
7.5
14.9
31.7
13.8
17.8
24.6
0.0
24.6
10.6
14.0
34.9
16.3
18.6
23.4
0.0
23.4
9.3
14.2
33.8
15.0
18.8
22.4
0.0
22.4
8.3
14.1
32.3
13.2
19.1
22.5
0.0
22.5
7.5
15.0
32.0
12.5
19.6
22.9
0.0
22.9
6.8
16.1
32.2
11.8
20.4
23.5
0.0
23.5
6.2
17.2
32.6
11.7
20.9
39.0
31.2
7.9
22.3
14.8
7.2
16.8
25.7
17.5
8.2
38.0
21.2
16.5
-12.3
28.7
21.4
7.2
30.8
21.0
9.5
-2.1
33.3
27.4
5.9
30.4
19.4
10.5
2.9
34.6
28.5
6.1
26.9
18.3
8.2
7.7
33.2
26.9
6.2
26.2
18.2
7.5
7.0
31.5
25.1
6.4
25.9
18.3
7.1
5.7
30.7
23.6
7.2
25.4
18.3
6.7
5.3
30.0
22.2
7.7
25.0
18.2
6.3
5.0
29.7
21.2
8.5
24.5
18.0
6.0
5.2
-26.4
-26.4
12.5
-44.3
-37.4
22.5
-35.5
-33.6
21.3
-41.5
-37.0
16.9
-36.5
-36.5
14.6
-33.8
-33.8
14.3
-31.7
-31.7
14.9
-29.8
-29.8
15.1
-28.0
-28.0
15.1
-26.5
-26.5
14.7
-79.4
58.2
49.3
19.2
42.0
8.2
0.7
9.8
7.0
11.7
7.3
11.1
5.7
12.4
7.6
11.6
(Annual percent change, unless otherwise indicated)
Monetary sector
Net foreign assets
Net domestic assets
Credit to private sector
Broad money
67.7
2.0
1.2
6.2
17.9
3.6
2.3
5.0
18.9
5.8
3.1
7.2
8.4
9.2
5.7
9.2
7.6
10.3
6.5
10.0
6.8
10.5
6.3
10.0
(Billions of U.S. dollars, unless otherwise indicated)
External sector
Exports and re-exports of goods, of which:
Hydrocarbon
Nonhydrocarbon, excluding re-exports
Imports of goods
Current account balance
Current account balance (in percent of GDP)
External debt (in percent of GDP) 4/
Gross official reserves 5/
In months of next year's imports of goods & services
Memorandum items:
Local currency per U.S. dollar (period average)
Nominal effective exchange rate (2000 = 100)
Real effective exchange rate (2000 = 100)
240
103
43
176
24.8
7.9
43.2
30.9
2.0
192
68
44
150
9.1
3.4
48.4
25.5
1.5
212
75
51
161
9.1
3.1
47.2
32.8
1.6
279
112
62
198
33.3
9.2
41.0
36.4
1.6
307
122
69
217
40.0
10.3
39.0
40.8
1.7
321
118
74
228
40.9
10.4
39.5
44.4
1.8
336
113
80
242
40.1
9.9
40.1
48.2
1.8
347
109
87
254
39.6
9.6
40.3
51.4
1.9
360
106
95
266
39.8
9.3
40.3
55.1
1.9
376
105
102
282
40.8
9.1
39.9
58.6
1.9
3.67
84.2
102.8
3.67
88.3
107.9
3.67
87.5
103.7
3.67
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
Sources: U.A.E. authorities; and Fund staff estimates.
1/ In percent of nonhydrocarbon GDP.
2/ Excludes DFSF related transactions for Dubai, and 2011 ALDAR support and investment income for Abu Dhabi
3/ Banking system claims only. Excludes debt raised by federal and emirati governments in the international markets.
4/ Foreign liabilities of banking system only due to incomplete coverage of debt raised by non-banks in the international markets.
5/ Excludes foreign assets of sovereign wealth funds.