IMF Warns UAE From $30 Bln Debt

The International Monetary Fund has praised efforts made by the UAE to reduce debt but also warned that the country still faces risks posed by $30bn of debt owed by government-related firms due this year.

The IMF commended the progress made in restructuring and managing the debt of government-related entities (GREs), but stressed the need for further efforts to mitigate the fiscal risks posed by these entities. While noting that the Dubai World debt restructuring was completed, the IMF cautioned that several other troubled GREs are still in the process of restructuring.

“GRE indebtedness, refinancing needs and reliance on foreign funding remain high, with about $30bn GRE debt maturing this year and significant amount of debt falling due in 2014-15,” it said. The IMF encouraged further deleveraging and strengthening of impaired GRE balance sheets, increased transparency, and improvements in corporate governance at GREs.
On a more positive note, the IMF pointed out that the recovery of the UAE economy is continuing despite an uncertain global economic environment. “High oil prices and increased production, strong growth in Asia, and the UAE’s perceived safe haven status in the context of the regional turmoil contributed to an estimated real GDP growth of 4.9% in 2011,” the statement said. Directors also regarded the fiscal stance as appropriately focused on a gradual consolidation to unwind the large fiscal stimulus undertaken in response to the 2009 crisis without undermining the economic recovery. They particularly welcomed the consolidation plans in Dubai, which will help improve the emirate’s debt sustainability in the face of contingent liabilities related to government-related entities (GRE) and the still weak real estate market.

“Despite the continued weakness of the construction and real estate sectors in the wake of the 2009 crisis, real nonhydrocarbon growth picked up to an estimated 2.7% last year, supported by trade, logistics, and tourism. For 2012, oil production is projected to be flat, whereas nonoil growth is expected to strengthen further to 3.5%. Inflation remained low at 0.9% in 2011, mainly due to a continuing decline in housing rents, and price pressures are expected to remain subdued this year,” the statement said.

Executive Directors welcomed the continued economic recovery and favorable near-term outlook, but noted downside risks from the uncertain global environment and regional geopolitical tensions. Going forward, directors encouraged the authorities to continue their efforts to sustain growth and diversify the economy, while maintaining macroeconomic and financial stability.

Directors also took note of the resilience of the banking sector grounded on ample liquidity and capital buffers. They nonetheless encouraged the authorities to continue monitoring closely the financial situation of individual banks and their ability to cope with adverse shocks.

Directors emphasized the importance of shielding the banking system from taking further GRE-related risks, including by avoiding channeling bank funding to non-viable GREs. In this regard, they welcomed the recent introduction of aggregate lending limits to GREs.

Directors also suggested further strengthening the governance framework for the financial sector. Looking forward, they encouraged the development of domestic debt markets, which would among other things support banks’ liquidity management in preparation for the introduction of the Basel III liquidity framework.

Press Release