Successful Expo 2020 bid will see a definite upside in Dubai Real Estate.
International agency maintains demand from expats from broader region has increased.
In addition, the international agency maintains that a successful bid for the World Expo 2020 will see acceleration in the pace of the implementation of many of the recently announced megaprojects.
“Dubai aims to build on its successes in becoming a services hub for the wider region and recently announced plans for several megaprojects in real estate and tourism, notably including Mohamed bin Rashid City,” the IMF notes.
“If Dubai succeeds in its bid for the World Expo 2020, the implementation of many of these plans would likely accelerate,” the agency highlights. The IMF notes in its report that Abu Dhabi continues to expand its hydrocarbon production capacity.
“Supported by a perceived safe haven status amid regional political and social unrest, capital flows have strengthened, demand from expatriates from the broader region has increased, and the real estate sector, which had been impaired since the 2009 crisis, has stabilised in Abu Dhabi and started to recover in Dubai,” the IMF notes in its mission conclusion statement.
The report points out that the country’s non-oil economy continues to gain strength and, coupled with fiscal consolidation, it means that the global price of oil required for the UAE to achieve fiscal breakeven has dropped quite a bit.
“The UAE began last year to withdraw the large fiscal stimulus that was put in place in the wake of the 2009 crisis,” the reports states. “The combined fiscal accounts of the federal and emirate governments posted a consolidation of the fiscal stance by 3 per cent of non-oil GDP, driven by consolidation in Abu Dhabi and Dubai,” it says.
“A salary increase for federal employees and an increase in Abu Dhabi’s subsidies and transfers were more than offset by reductions in other outlays, including Abu Dhabi’s capital expenditure. Together with strong oil revenues, this led to an overall fiscal surplus of close to 9 per cent of GDP. As a result, the fiscal break-even oil price, a measure of fiscal vulnerability to oil price shocks, improved from $84 in 2011 to $74 last year,” the report notes.
“Continued plans for consolidation would also further improve the implied break-even oil price to $71 this year, reducing the risk of having to tap into the UAE’s accumulated oil wealth in the event of a renewed large decline in oil prices,” the IMF further states. The report adds that the planned withdrawal of stimulus is unlikely to undermine the recovery in non-oil economy.
“Dubai’s ambitious expansion plans warrant measured execution amid strengthening access to external financing in an environment of high global liquidity,” the report points out. “Dubai’s megaprojects will be executed to a large extent through GREs. While further investment in the development of Dubai’s economy is welcome, the authorities should ensure that, in line with current intentions, execution will be gradual and flexible depending on demand,” it cautions.
“New investments should be structured in a way that strictly limits risk-taking by the still highly indebted GRE sector. This will help contain fiscal risks and reduce the likelihood of another boom-bust cycle. Managing these risks thus calls for prioritizing and sequencing major projects, assessing the quality of planned spending, and for improving the framework to manage scrutiny, selection, delivery, and funding of major projects.”
Among some of the other risks facing the UAE, according to the agency, is the close links with international financial markets and emerging Asian economies, while domestically, a key medium-term risk is related to a possible renewed building up of a boom-and-bust cycle.
To counter a potential domestic risk, the IMF suggests hiking registration fees of properties in Dubai in the face of an overheating real estate sector, a move that will also help the emirate garner additional revenues to offset the fiscal consolidation process.
“At the emirate level, a faster pace of consolidation in Dubai would be desirable to address the emirate’s continued debt-related risks. Particularly if risks of overheating in the real estate market rise, this could be supported by targeted increases in real estate-related fees, which would also help generate revenue in support of fiscal consolidation,” the IMF notes.
Among foreign risks vis-à-vis economic ties with emerging Asian economies, most notably India, the IMF said that any worse-than-expected slowdown in those economies could have a negative impact on the UAE;’s growth prospects.
“Emerging Asia, especially India, accounts for a large and growing share of exports, and robust external demand from Asia has helped limit the impact on the UAE of the weaknesses of European economies and of the sanctions on Iran. A slowdown in emerging Asia would weaken an important driver of goods export growth and reduce tourism and foreign real-estate demand,” it notes in the report.
“Renewed optimism fuelled by rising real estate prices and loose global liquidity conditions could prompt a renewed cycle of imprudent risk-taking and re-leveraging by GREs [government-related enterprises] and private companies,” the IMF notes, and adds that this “could also affect banks’ balance sheets in light of their strong interconnectedness with GREs.”
Nevertheless, the IMF concludes that there remain “a number of upside risks to the outlook” of the UAE economy. “A faster recovery in the advanced economies would have a positive effect on global growth and oil prices. More generally, higher oil prices would further support fiscal revenues and the external current account, as long as oil exports are not disrupted and confidence is maintained. Adequate macroeconomic policies and borrowing restraint by GREs in the currently favorable economic conditions can support high and sustainable economic growth without incurring undue macroeconomic risks,” the report concludes.