The UAE’s GDP growth reached 4.5% in 2013 supported by tourism, hospitality, and real estate, the IMF said following a consultation visit to the UAE. In 2014, the GDP growth will also remain strong at 4.5% driven by ongoing momentum in the non-oil economy, the IMF forecasts. The oil-growth, however, will likely remain limited this year due to ample global oil supply. Inflation is expected to rise moderately, driven by rising rents, the IMF noted.
The fund underscored that the UAE’s real estate sector has witnessed a steep recovery, with prices in Dubai residential real estate market having increased rapidly in selected areas.
Growth in the coming years will benefit from a number of megaprojects and Dubai’s successful bid for the Expo 2020, according to the IMF. Still, the total cost, pace of execution, and financing of the new megaprojects remain uncertain, the IMF said, warning that if not implemented prudently, these projects could exacerbate the risk of a real estate bubble.
The planned projects ahead of the Expo 2020 may create additional financial risks for Dubai’s government-related entities (GREs) and the banking system given the still considerable debt overhang from the 2009 crisis, the IMF added.
“Fiscal policy adequately continues to unwind the large expansion that was put in place in the wake of the 2008/9 global financial crisis,” the IMF said. The budget execution of the UAE federal and emirates governments for the first nine months of 2013 was broadly in line with spending plans. The hike in Dubai’s real estate registration fees from 2% to 4% announced last October was a positive step in addressing speculation in the real estate market, according to the IMF. Further increases could be introduced in case the pace of price increases does not abate sufficiently, the fund noted. The IMF was upbeat on the newly implemented regulations on loan concentration and real estate exposure for banks. Such regulations will help protect the soundness of the banking system, which has remained largely capitalized and liquid, the IMF said.
The new loan concentration caps will help contain risks to banks’ balance sheets in the context of the newly planned megaprojects, according to the IMF.
The new maximum loan-to-value ratios for mortgage lending will also provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market. “The central bank could consider further tightening these rules if price increases in the real estate market remain very large,” the IMF concluded.
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