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Abu Dhabi, UAEThursday 13 December 2018

UAE's economy to strengthen in 2018, says IMF 

Weakening Dubai real estate market no threat to wider economy, says fund

The Dubai canal by night. Rustam Azmi / Getty
The Dubai canal by night. Rustam Azmi / Getty

The United Arab Emirates economy is expected to recover gradually next year without suffering a significant blow to growth from the introduction of a 5 per cent value-added tax in January, a senior International Monetary Fund official said.

Natalia Tamirisa, IMF mission chief to the Arab world's second biggest economy, said Dubai's spending on preparations to host the Expo 2020 world's fair would help to boost growth.

On Sunday, Dubai announced a 19.5 per cent leap of spending in its 2018 state budget, largely because of higher allocations for infrastructure.

“We see a gradual recovery for the UAE over the next few years on the back of firming oil prices, a pick-up in global trade, investment for Expo 2020 and easing fiscal consolidation,” Tamirisa said in a telephone interview on Monday.

Non-oil sector growth is projected to rise from 1.9 per cent this year to 2.8 per cent next year, and to continue climbing to between 3.3 and 3.5 per cent in 2020, she said.

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The introduction of VAT next month will be a big change for consumers and companies, which have long been accustomed to minimal taxation in the Gulf.

Analysts believe some consumers may rush to make purchases this month to beat the tax, potentially setting the economy up for weakness early next year when the spending fades.

But Tamirisa said the effect was not likely to be large enough to hurt the economic recovery, and that the government looked set to manage the launch of the tax without disrupting business.

"After the initial adjustment we're expecting smooth operation of the system. The preparations by the government have been quite extensive."

The IMF's forecasts assume oil will average over US$62 a barrel next year, based on futures prices, compared to an average of about $54 this year. This should help strengthen the UAE's finances in 2018 despite looser budgets, Tamirisa said.

The IMF expects the UAE’s consolidated fiscal deficit, including the federal government and all seven emirates, to shrink to 1.3 per cent of gross domestic product next year and gradually disappear in subsequent years, from 2.2 per cent this year and 2.5 per cent in 2016.

Dubai's real estate market has been slumping for over two years, but Tamirisa described the slump as natural given an ample supply of new housing and an economic slowdown, and said it was not a fundamental threat to the economy.

"Oil prices still play an important role in the economy so it's normal that they're still working their way through the market," she said, adding that the market still looked likely to recover after a period of consolidation.

Banks are much more resilient than they were during the UAE's property market crash nearly a decade ago, and the fact that rents and real estate investment are not subject to VAT should help the market gain strength in the long term, she said.