The global financial crisis and Dubai's debt restructuring raise important challenges for the United Arab Emirates economy, but its prospects remain favourable, the International Monetary Fund said on Wednesday.
The crisis sent the world's third largest oil exporter into a downturn last year, its first since 1993, while Dubai debt woes are seen weighing on the Gulf country's recovery in 2010.
The IMF said most of its executive directors agreed the UAE's dollar peg provided a credible anchor and contributed to its macroeconomic stability, but stressed the importance of a "speedy and predictable" approach to Dubai World's debt restructuring.
"Executive directors commended the UAE authorities for their decisive response to shocks from the global financial crisis, lower oil prices, and the bursting of the Dubai bubble," the IMF said in a statement.
"Directors noted, however, that these shocks, together with the recent announcement that Dubai World would seek a six-month debt standstill, have raised important challenges for the UAE economy," it said.
Dubai debt troubles made the IMF cut its forecast for UAE's gross domestic product growth to 0.6 per cent in 2010 despite oil price recovery, from 2.4 per cent in its October report, compared with an estimated contraction of 0.7 per cent in 2009.
But it also said the government of the oil-rich emirate of Abu Dhabi planned to reduce its fiscal stimulus in 2010, which would result in a slower non-oil growth.
"The authorities have indicated they are likely to scale back their fiscal stimulus," Masood Ahmed, IMF director for Middle East and Asia, told a conference call.
The fund said last month the UAE is likely to see GDP growth of zero to 1 per cent this year. A Reuters poll showed analysts expecting the second largest Arab economy to expand by 2.5 per cent this year.
Dubai rattled global markets on November 25 with plans to delay repayment on $26 billion in debt linked to state-owned Dubai World and its main property units.
The flagship company is still working on a restructuring plan for $22bn and uncertainty around the talks has pushed up bond yields and Dubai's debt insurance costs.
The IMF, which concluded the Article IV consultation with UAE on February 3, also said Dubai's total debt pile stands at $86bn. Analysts polled by Reuters put the figure at as high as $101bn.
The UAE central bank and Abu Dhabi lent an overall $20bn to Dubai last year to help its neighbour, known for ambitious construction projects, restructure debts.
Dubai's GDP was seen shrinking by 1.3 per cent this year, the same pace as in 2009, Ahmed said, adding a faster restructuring of its debts could put a floor under the emirate's contraction.
The IMF also stressed the need for increased transparency of economic and financial data including financial accounts of government-related entities such as Dubai World.
Fitch Ratings became the third agency earlier on Wednesday to downgrade a unit of Dubai Holding, owned by the emirate's ruler, citing a lack of information about the state's ability to support the business.
In boom years, Dubai lured investors to extravagant projects such as its palm-shaped islands, borrowing to invest through a network of state-linked firms that offered limited transparency.
Consider also reading:
Dubai debt woes hurt UAE property market: Nomura
Dubai World doubts weigh on debt insurance costs
Gulf lending redefined by Dubai's debt standstill
Dubai debt confusion dents market confidence
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