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UAE Economy Buoyant

by Lorys Charalambous,, Cyprus

06 August 2013

A recent report from the IMF Executive Board found that the economy of the United Arab Emirates continued to recover in 2012 supported by favorable oil prices, capital inflows and the UAE’s safe-haven status amid the regional political and social unrest.

Aiming to build on its achievements in becoming a regional services and tourism hub, Dubai recently announced plans for several new megaprojects in real estate and tourism that will be executed to a large extent through its Government-Related Entities (GRE).

The banking system in the UAE maintains significant capital and liquidity buffers, and non-performing loans may finally have peaked at 8.7 percent in December 2012. Nonetheless, further restructuring of GRE debt, including possibly on already-restructured debt, could still add materially to this level.

Short- and medium-term growth prospects are positive, and external downside risks, while still substantial, have declined. The non-oil economy is projected to expand by over 4 percent per annum in the coming years on the back of Dubai's strong core services sectors and Abu Dhabi's diversification efforts. The still-uncertain global economic and financial environment could pose external risks to this favorable outlook, although the UAE's sizable foreign assets and improving fiscal position provide significant buffers.

In this environment, it will be key to enact policies to strengthen the economy's resilience and mitigate the risk of entering a renewed boom-bust cycle. The pace of recovery in some segments of the real estate market and a number of announcements since late 2012 of new megaprojects in real estate and tourism warrant a cautious approach to policymaking. This approach should entail implementing further fiscal consolidation, limiting new risk-taking by the large and still highly indebted GRE sector, and devising prudent financial sector regulation. At the same time, there is a need for continued focus on dealing with the legacy of the 2009 crisis.

In 2012 Dubai's tax revenue reached AED8.4bn (USD2.3bn), of which customs tax was AED7bn and income tax was AED1.3bn.

TAGS: United Arab Emirates | environment | tax | banking | regulation | Dubai | services | Investment | Property Investment | Invest | Investment

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