Sustained fiscal consolidation and brightening growth prospects have been strengthening Dubai's resilience to external shocks as the emirate gears up for an economic upswing averaging 5.6 per cent in the next six years, the International Monetary Fund said.
The robust growth for Dubai in the coming years will be driven by big real estate projects and huge spend in preparation to host the Expo 2020 world's fair, the Washington-based Fund said in a report on Sunday as its chief Christine Lagarde sounded more upbeat about the global economic activity by noting that it should strengthen in the second half of this year and accelerate in 2015.
The IMF also sounded very positive about Dubai's ability to finance its debts as a result of stronger growth and more conservative spending.
However, the IMF hinted that Dubai's growth would only be 3.5 per cent and would be vulnerable if the global economy came under stress again.
The IMF's forecast for Dubai appears brighter in comparison with the outlook presented by Bank of America Merrill Lynch on Thursday. The bank predicted that Dubai's economic recovery had become more entrenched, and the 2020 Expo bid provided the emirate critical upside potential with the gross domestic product on track to accelerate to five per cent in 2014-15. The bank argued that Dubai's recovery is helped by high oil prices, support from the external sector, accommodative monetary policy, the rebound in the real estate sector, steady yet uneven progress on government related entities' restructuring and a mild fiscal consolidation drive.
The IMF report forecasts that Dubai's government finances would swing to a small surplus of 0.5 per cent of GDP in 2014, turning positive for the first time since 2006, from an estimated deficit of 0.3 per cent in 2013. The IMF cautioned that Dubai needed to introduce further measures to shield its real estate market from an increase in speculative demand that could cloud the U.A.E.'s buoyant economic outlook.
The overall scenario is that the U.A.E. is likely to cut its fiscal spending to Dh317 billion in 2014 from a record Dh324 billion in 2013. The country's budget stance is still too expansionary to save enough wealth for future generations, the IMF said.
The Fund said Dubai's government debt is expected under a baseline scenario to fall gradually to 41.6 per cent of GDP in 2019 from 60.2 per cent last year, the IMF said in its report prepared after annual consultations with the U.A.E. authorities.
That would be well below a peak of 66 per cent in 2009, when a property market crash pushed Dubai to the brink of default.
However, despite the overall solid economic outlook for the U.A.E., the IMF identified "potential risks from rapidly rising residential real estate prices and, more broadly, from the economy's dependence on the global oil market, albeit some recent progress in economic diversification has been achieved. The U.A.E. does possess sizeable buffers should it need to absorb a shock, the IMF said, warning that Dubai's real estate sector, specifically, continues to be a source of concern. "The strengthening real estate cycle, particularly in the Dubai residential market, could attract increased speculative demand, creating the risk of unsustainable price dynamics and an eventual, potentially disruptive correction,” the IMF said.
The IMF cautioned that U.A.E.'s economic and financial policies should continue to aim at mitigating the risk of "a renewed cycle of exuberance”, and at strengthening the fiscal position. "Efforts in deleveraging and restructuring GREs should continue.”
The IMF noted that monetary policy in coming years is expected to tighten under the US dollar peg, helping the U.A.E. mitigate the risk of potentially large private credit growth, and could be supported by macro-prudential tightening should deposit and credit growth accelerate further.
On real estate, the Fund said further measures, such as setting higher fees for reselling properties within a short time, and restrictions on reselling off-plan properties, are warranted, particularly if rapid price increases continue. "These measures could be supported by targeted macro prudential tightening in case real estate lending picks up further.”
On the U.A.E.'s financial stability, the IMF observed that its banking system maintained significant capital and liquidity buffers.
Source: Khaleej Times