Strong Trade, Services Support the UAE's Economic Recovery

Non-oil recovery strengthens, despite weak construction and real estate sectors

Government-related entities still pose risks

Fiscal consolidation should increase government's room for maneuver

The UAE has been slowly recovering from the 2009 property market crisis, which hit the economy hard. The country is benefiting from high oil prices and oil production volumes. Going forward, there is limited near-term scope to expand oil production further. “Strong trade, tourism, logistics, and manufacturing are now driving growth, despite lingering weakness in the construction and real estate sectors,” said Harald Finger, IMF mission chief for the UAE.

The UAE has been reaping the benefits of its early efforts to diversify the economy, the IMF says, projecting that the country’s nonhydrocarbon growth will reach 3.5 percent in 2012.

Real estate drag

The large oversupply of real estate continues to be a drag on the economy, the IMF notes. Since mid-2008, real estate prices have fallen by more than 60 percent in Dubai, and to a lesser extent in Abu Dhabi. The current glut, together with the completion of additional projects in the coming years, make an early and broad-based recovery of the sector unlikely, the report says.

The UAE’s government-related entities—which posed a risk to the economy in 2009—are still facing financial challenges in light of their high debt and rollover needs. While the debt of some of these companies, including Dubai World, has been restructured, this process is taking longer in other cases. “Improving corporate governance of these entities and increasing transparency about their financing strategies, financial conditions, and debt profile will be needed to strengthen market confidence,” Finger said.

Shielding the country’s banking system from risk stemming from these government-related entities is essential, and the recently introduced aggregate limits on banks’ lending to government-related entities are a step in the right direction, the report says. Although the banking system maintains sufficient buffers to withstand a further deterioration in asset quality and external liquidity conditions, individual banks could be affected if downside risks materialized.

Fiscal...