UAE reserves set to surge 9% to $83.7 billion in 2016
Seen to hit $118.4b by 2020; current account surplus to pick up.
The gross official reserves of the UAE is projected to grow 8.9 per cent to $83.7 billion in 2016 from $76.8 billion in 2015 and hit $118.4 billion in 2020 as the economy picks up gradual growth momentum over the next five years regardless of the oil price plunge, a forecast by the International Monetary Fund shows.
In tandem with the surge in reserves, the UAE will also witness a gradual pick-up in its current account surplus that has shrunk to a record low of five per cent of gross domestic product. According to the forecast, the current account surplus is on track to rise from $17.6 billion in 2015 to $22.6 billion or 5.9 per cent of GDP in 2016, and would hit $33.4 billion by 2020.
"Lower oil prices are eroding long-standing fiscal and external surpluses, but the UAE has continued to benefit from its perceived safe-haven status and large fiscal and external buffers that have helped limit negative spillovers from lower oil prices, sluggish global growth, and volatility in emerging market economies," the IMF said after its board's Article IV Consultation with the UAE.
The UAE's non-oil growth, which remained robust at 4.8 per cent in 2014 - driven by construction, capital spending in Abu Dhabi and services underpinned by Dubai's transportation and hospitality sectors - is projected to slow down to 3.4 per cent in 2015 and would pick up steam from 2016 and post a 4.6 per cent growth by 2020.
"Real estate market prices have edged down since mid-2014. With past increases in rents only feeding gradually into consumer prices, inflation increased to 4.3 per cent year-on-year in May 2015, also reflecting upward adjustments of electricity and water tariffs in Abu Dhabi. Credit to the private sector has picked up. GREs [government-related entities] have continued to strengthen their finances," the IMF said.
The Washington-based fund said the economic outlook of the UAE is expected to moderate amid lower oil prices.
"Growth in oil production will likely to moderate given the global supply glut. Annual inflation is projected to pick up to 3.8 per cent in 2015. The overall fiscal balance this year is expected to turn negative for the first time since 2009 to record a deficit of 2.9 per cent of GDP, but is expected to return to surpluses from 2016. The current account surplus is also projected to decline substantially to five per cent of GDP and will slowly increase with the projected gradual recovery in oil prices. Credit growth is expected to remain supportive of the activity," it said.
The fund suggested that in "an adverse scenario with a decline in deposits, liquidity management could be eased to support credit growth. Government deficit financing should avoid a tightening in liquidity in the banking system." While fiscal consolidation requires rationalisation of spending, the quality of spending cuts is crucial to avoid damaging the country's competitiveness and long-term growth prospects, the IMF argued.
"Government investments should be preserved relative to non-hydrocarbon GDP to support infrastructure, while the implementation of GRE megaprojects should be gradual, in line with the expected demand. Close oversight and continued strengthening of debt management frameworks are crucial," the IMF said.
The IMF welcomed Central Bank of the UAE's plans to strengthen the banking regulatory and supervisory framework with no exemptions in holding banks accountable.
"The banking sector is resilient and has enough capital and liquidity buffers to withstand an adverse shock. The Central Bank plans to phase in Basel III capital and liquidity standards over 2015-19 and to strengthen its risk-based supervision are welcome and should be timely implemented."
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