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IMF: Regional Unrest May be Beneficial for the UAE

UAE : 25 May 2011

The International Monetary Fund (or IMF) stated that unrest in the region may be beneficial for the UAE, based on indications that the second-largest economic center in the Arab world will see gains from tourism and the diversification of investments in the region.

The IMF also noted the downside risks of the unrest in their most recent assessment, stating that repricing may result in more difficulties throughout the region’s financial market.

A Staff Report in the IMF’s 2011 Article IV Consultation stated that increasing oil prices will produce benefits in the UAE, an exporter of hydrocarbons. It added that if Asian demand decreases, the sustained higher prices will have an effect on recovery.

In the report, GDP growth in non-hydrocarbons is expected to increase from the 2010 figure of 2.1 percent to 3.3 percent for this year. This would be a result of strengthened tourism and logistics, as well as increased trade in Dubai and rising public investments and spending in the region of Abu Dhabi.

A real estate overhang combined with short-term refinancing concerns in government agencies that have been over-leveraged to weigh on the outlook for the near-term, according to the IMF.

The IMF also stated that declining rents have allowed the CPI (or consumer price inflation) rate to maintain a moderate 4.5 percent level, despite increasing food prices across the globe. The fund also noted that the UAE economy enter the recovery stage last year, although the rate was more modest than other neighbouring nations in the GCC.

The report estimated that real GDP in the UAE rose by 3.2 percent last year, on the backs of higher oil prices and solid demand from traditional Asian trading partners.

This past December the 12-month CPI figure sat at only 1.7 percent, higher than the 0.3 percent contraction reported at the close of 2009. The balance of the external current account was up due to increased prices and production of oil.

Exports grew by 15 percent last year while imports grew by 6 percent. Estimates place the UAE’s current account balance at 7.7 percent of GDP for 2010. Inflows of deposits in the latter half of last year allowed the financial account balance to improve. Due to this condition, the foreign exchange reserves in the central bank came back from losses that occurred in 2009, hitting the $32 billion mark by the end of the year. This amount is equal to imports for 1.7 months.

The report called the 2010 fiscal policy “contractionary.”

After a sharp widening in 2009 the primary fiscal deficit – not including investment income – for non-hydrocarbons fell to 35.2 percent of the non hydrocarbon GDP last year. This is down from the 2009 figure of 44 percent.

This decline was a result of slower implementations for Abu Dhabi projects, including those through government-related entities (or GREs). Transfers to GREs in Dubai were also lower.

Higher revenues in hydrocarbons have caused the consolidated fiscal deficit to shrink down to 1.3 percent of the GDP last year, a significant decrease from the 12.6 percent reported in 2009.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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