1. This statement provides information on recent developments in the United Arab Emirates that has become available since the staff report was circulated to the Executive Board on December 3, 2008. This information does not change the thrust of the staff appraisal.
2. The oil price baseline assumption for the World Economic Outlook (WEO) was revised downward (most recently in January 2009) and the U.A.E. announced that it will cut oil production starting in January 2009 in line with OPEC’s decision. These developments affect staff projections of oil exports, fiscal revenues and growth. The new assumptions imply substantially lower U.A.E oil export prices of $49 per barrel for 2009 and $59 per barrel for 2010 and an estimated decline in oil production by 5 percent in 2009. Assuming unchanged expenditure policies, the fiscal surplus in 2009 would reach only 0.4 percent of GDP compared to 12.1 percent in the staff report, and the current account would register a small deficit of 3.7 percent of GDP in 2009 compared to a surplus of 8.7 percent in the staff report. Real GDP growth would reach only 2.1 percent compare to 3.3 percent, on account of lower oil production. From 2010 onward, both the fiscal and the current account balances would record modest rising surpluses.
3. As envisaged in the staff report, under this scenario maintaining the increased public expenditure levels through 2009 remains appropriate and feasible, and additional fiscal stimulus would be needed should the non-oil growth and employment situation deteriorate more than expected. The likelihood of the latter has risen in view of the expected downward revision of WEO projections for partner country and global trade growth. Furthermore, the revised oil prices imply a substantial reversal of recent terms of trade gains and hence a depreciation of the equilibrium real exchange rate. While the absence of recent price data does not allow a quantitative update, it is likely that the dirham’s moderate undervaluation assessed in the staff report is by now eliminated, even earlier than foreshadowed in the staff appraisal. Indeed the dirham may by now be moderately overvalued.
4. The Dubai government in late 2008 formed a high-level committee to manage the fallout from the global crisis on Dubai’s real estate market. In January 2009 a federal decree established a Federal Council to Coordinate Fiscal Policy with responsibilities to coordinate budget and expenditure across emirates and at the federal level to ensure that the overall fiscal stance remains supportive of macro-economic stability. The federal government is merging two Dubai-based mortgage companies that have been facing difficulties raising financing in the wake of the liquidity crunch (Amlak Finance and Tamweel, which together account for and estimated 2/3 of Dubai’s housing lending market) with an amalgamation of the Abu Dhabi’s Real Estate Bank and Emirates Industrial Bank. The government would hold a majority stake in the new entity (Emirates Development Bank) which will have access to the government emergency liquidity support facilities. This might help revive access to financing for buyers in the real estate market and mitigate the risk of other institutions exposed to Amlak and Tamweel through lending or ownership. Several public real estate developers in Dubai have announced substantial lay-offs, as well as a slow-down in the launching of new and implementation of ongoing projects. Several banks have further tightened mortgage lending, while major developers have eased restrictions on resale of unfinished properties (that had been earlier introduced to discourage speculation).
5. As of December 31, 2008 stock markets remained sharply down for the year, more so in Dubai (-73 percent) than in Abu Dhabi (-48 percent). However, both markets have shown some recovery in early 2009. The U.A.E. central bank decided not to match the U.S. interest rate cuts in late October and December, the first time of not following the Fed moves. Interbank rates in the U.A.E. did not follow recent LIBOR declines and remained stable and around 4 percent, pointing to continued liquidity tightness. Credit default spreads came somewhat down from recent peaks, but remain elevated at around 650 bp for Dubai and 250 bp for Abu Dhabi. One-year dirham/U.S. dollar currency forwards now discount the dirham by around 1 percent. Anecdotal evidence continues to point to declining property prices and a rise in distressed sales in at least some segments of the U.A.E. market since October 2008.
6. Heads of State of the Gulf Cooperation Council (GCC) in late December approved the draft of a monetary council in 2009, forerunner of a common central bank. The agreement is to be ratified by all member states before end-2009. The deadline of 2010 for establishing a common currency was not changed, but the monetary council may adapt the schedule in view of the needed preparatory work.