UAE To Cut Fiscal Spending, Faces Risks In Property Sector – IMF

The United Arab Emirates is likely to cut its fiscal spending further in 2014 as the oil and real estate-powered economy is growing strongly and private credit growth is recovering, the IMF said on Wednesday.

“The combined federal and emirate budgets imply further fiscal consolidation this year,” the International Monetary Fund said following annual consultations. It said this was “appropriate as it would undo earlier fiscal stimulus that is no longer needed.”

The budget of Abu Dhabi – which accounts for roughly three-quarters of the OPEC member’s overall fiscal expenditure – implies a fiscal tightening estimated at nearly six per cent of non-oil gross domestic product, the IMF said.

The fund said cuts would be made in security, defence, and other current expenditures. Both Abu Dhabi and trade hub Dubai are aiming for gradual fiscal consolidation.

“As budget amendments in Abu Dhabi in the course of the year are likely to result in higher than initially budgeted spending, the mission projects a more moderate consolidation for 2014,” the IMF said.

Abu Dhabi’s fiscal consolidation was less than budgeted in 2013, driven by higher security, defence, and other current spending, the IMF said.

The UAE’s overall fiscal surplus is estimated to have declined to 6.5 per cent of GDP last year from 8.9 per cent of GDP in 2012, leading to an estimated increase in the fiscal break-even oil price to $84 per barrel from $78 in 2012.

That still leaves the UAE, which pegs its currency to the U.S. dollar, with a comfortable fiscal cushion if oil prices soften, as analysts predict, to $106 per barrel this year and $102 in 2015 from around $109 now.

PROPERTY RISKS

The IMF also echoed recent warnings about the risks stemming from the accelerating property sector, especially in Dubai.

“The strengthening real estate cycle, particularly in the Dubai residential market, could attract increased and potentially destabilising speculative demand, spurring the risk of unsustainable price dynamics and an eventual correction.”

“With rent controls recently loosened, there is also a risk that rising real estate prices will feed more strongly into inflation,” it added.

The UAE central bank said this week that residential rental yields in Dubai and Abu Dhabi could indicate growing imbalances and property market overheating.

But Dubai’s land department brushed off the warning, saying the property market growth was driven by the economy rather than by speculation.

The IMF said Dubai’s megaprojects could also create additional financial risks to the emirate’s still substantially indebted government-related entities (GREs).

Dubai’s total government and GRE debt is estimated at $142 billion, or 141 per cent of Dubai’s GDP, of which $34 billion is government and government-guaranteed debt and $92 billion falls due from this year to 2019, the Fund said.

“Further strengthening measures to discourage speculation would help mitigate the risk of a boom and bust cycle. Imposing additional fees and restrictions on reselling off-plan properties, as currently under consideration, would further discourage speculative demand,” the IMF said.

It also said the central bank could consider further tightening rules on maximum loan-to-value ratios for mortgage lending and debt-service-to-income limits if price increases in the real estate market remain very large and if growth in property lending keeps rising.