A view from the famous Dubai Marina high-end district
The United Arab Emirates is succeeding in strengthening its state finances by restraining spending, and managed last year to reduce the oil price which it needs to balance its budget, the International Monetary Fund said on Thursday.
But the possibility of another boom-and-bust cycle in debt-laden Dubai is a risk for the UAE economy in the medium term, the IMF warned after the emirate announced a string of huge real estate development projects.
The IMF's report, released after annual consultations with the UAE, indicated the country is doing more than other Gulf Arab oil exporters to rein in growth of government spending and reduce its vulnerability to any steep fall of the oil price.
Hit by the global financial slump, Gulf Arab countries boosted spending sharply from 2009, and increased it further in the wake of the Arab Spring uprisings of 2011. The higher spending has succeeded in keeping economies growing, but means state budgets could fall into deficit if oil prices slide.
The UAE began curbing its spending last year, more than doubling its total fiscal surplus - the combined surplus of the federal government and all of the UAE's seven emirates - to 8.8 percent of gross domestic product from 4.1 percent in 2011, the IMF calculated.
This lowered the oil price which the UAE needs to balance its combined budget to $74 per barrel last year from $84 in 2011, the IMF said. Brent crude oil is now around $103.
By contrast, other Gulf Arab countries continued to increase state spending substantially last year and their budget break-even prices have been rising.
The IMF said it welcomed the UAE's plans to continue consolidating its finances: "For 2013, continued fiscal consolidation of around 2 percent of non-oil GDP is planned.
The UAE's finances are difficult to analyze because oil-rich Abu Dhabi, which accounts for roughly 80 percent of the country's fiscal spending, does not publicly release details of its annual budgets and outcomes.
In October, the federal finance ministry published 2011 consolidated fiscal data, releasing such information for the first time ever, but there has been no update on 2012 so far.
Because of lower oil prices, the IMF predicted the UAE's fiscal surplus would shrink to 8.1 percent of GDP this year, before narrowing gradually to 5.1 percent in 2018.
Despite its approval of the UAE's overall policy direction, the IMF warned of risks in Dubai, which suffered a crippling corporate debt crisis in 2009 but is now recovering strongly on the back of rebounding real estate prices.
"At the emirate level, a faster pace of consolidation in Dubai would be desirable to address the emirate's continued debt-related risks," the IMF said.
It also described "insufficient domestic policy reform to mitigate the risk of a renewed boom-and-bust cycle" as a risk for the UAE economy.
"Renewed optimism fuelled by rising real estate prices and loose global liquidity conditions could prompt a renewed cycle of imprudent risk-taking and re-leveraging by GREs (government- related entities) and private companies, which could also affect banks' balance sheets in light of their strong interconnectedness with GREs.
"In the absence of prudent policies, this could fuel short-term growth at the expense of medium-term stability."
Dubai's total debt remains substantial at $142 billion, or around 102 percent of its GDP, and $35 billion of that amount is in government and government-guaranteed debt, the IMF said.
The emirate's GREs have increased their debt to an estimated $93 billion from $84 billion in March 2012, and about $60 billion of that debt falls due in 2013-2017, it added.
In the last few months, state-linked Dubai companies have announced billions of dollars of new real estate projects. For example, last week Emaar Properties and Meraas Holding said they formed a venture to develop a huge area near Dubai's downtown; a commercial center, low- and mid-rise residences, an 18-hole golf course and other facilities would be built over 11 million square meters (2,700 acres).
"While further investment in the development of Dubai's economy is welcome, the authorities should ensure that, in line with current intentions, execution will be gradual and flexible depending on demand," the IMF said.
"New investments should be structured in a way that strictly limits risk-taking by the still highly indebted GRE sector," it said, adding that availability of financial data on the health of Dubai's GREs was still inadequate.
After protests by UAE commercial banks, the central bank (CBU) has postponed introducing planned caps on mortgage lending and loans to government-related bodies. The IMF said such rules were important to ensure financial stability.
"Looking ahead, the CBU should carefully monitor the interaction of mortgage lending and the real estate sector, and tighten the mortgage regulation or introduce new measures as needed," it said.