DUBAI: 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 yesterday. 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.”
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 mega projects could also create additional financial risks to the emirate’s still substantially indebted government-related entities.
“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.
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 6 percent of non-oil gross domestic product, the IMF said. “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 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.
Reuters
