Friday, Mar 16, 2012

Gulf News

Dubai The International Monetary Fund (IMF) on Wednesday cautioned the UAE on risks involving debt rollover of government-related entities (GRE) due to the uncertain global economic and financial environment.

An IMF delegation said the UAE’s real gross domestic product (GDP) will grow at 2.3 per cent this year, down from 4.9 per cent growth rate recorded last year, while inflation will remain at 1.5 per cent.

“The economic recovery looks set to continue. Real GDP growth reached an estimated 4.9 per cent in 2011, supported by increases in oil production. Non-hydrocarbon growth also strengthened to around 2.7 per cent backed by strong trade, tourism, and manufacturing, and despite continued oversupply in the property sector. Real non-oil GDP growth is projected to further strengthen to 3.5 per cent in 2012,” said Harald Finger, the IMF team leader following a two-week visit to the UAE.

“With limited potential for further increases in oil production in the near term, overall GDP growth is expected to moderate to 2.3 per cent. Inflation is likely to remain subdued at around 1.5 per cent this year,” he said.

An IMF mission led by Finger visited the UAE from February 28 to March 14, 2012, to conduct discussions for the Article IV consultation with the UAE. The mission met with Minister of State for Financial Affairs Obaid Humaid Al Tayer, Minister of Economy Sultan Bin Saeed Al Mansouri, Governor of the UAE Central Bank Sultan Bin Nasser Al Suwaidi, other senior government officials, as well as representatives from the business and financial community.

“In the region the economy appears to be consolidating at good levels. The recently released surveys of industrial confidence in the UAE and Saudi Arabia for February were in line with expectations and just down a little from the level of confidence in January,” said Gary Dugan, chief investment officer, private banking, for Emirates NBD.

‘Number of risks’

The current uncertain global economic and fin-ancial environment poses a number of risks to this outlook. The weak growth prospects in the advanced economies could lead to a pronounced decline in oil prices if regional geopolitical risks subside.

“Moreover, a renewed worsening of global financing conditions could make it more difficult to roll over some of the GREs’ maturing external debt and affect liquidity conditions in the banking system,” Finger said.

While the European Central Bank continues to throw money at the financial system, little of that cash has yet to make its way into the Eurozone economy.

Dugan said: “While other parts of the world look stronger we still fear that the Eurozone will remain in recession until much later this year.”

Many believe the Eurozone economy could be in recession up to the third quarter of 2012. A recession will only add to the debt problems of the Eurozone as governments will struggle to achieve budget surpluses that bring down debt.

“We still fear that as the year progresses and the markets see the lack of progress on debt reduction there will be further volatility and upset in the markets,” Dugan says.

In this environment, Finger, from the IMF, said the authorities’ plans to gradually consolidate fiscal policy were appropriate. The large increases in public expenditure that took place in response to the 2009 crisis should now be unwound as they expose the UAE to the risk of falling oil prices.

“The planned gradual pace of fiscal tightening will strengthen public finances without undermining the economic recovery. The recovery will also continue to be supported by an accommodative monetary stance under the peg to the US dollar,” he said.

Substantial progress has been made in the debt restructuring of GREs, but several troubled GREs are still in the process of restructuring. Moreover, the GREs are still faced with high refinancing needs and continued reliance on foreign funding.

By Saifur Rahman?Business Editor

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