United Arab Emirates: 2015 Article IV Consultation-Press Release; and Staff Report

KEY ISSUES Context. Lower oil prices are eroding long-standing fiscal and external surpluses, but the impact on economic activity in the UAE has been limited owing to large buffers. Real estate prices have declined somewhat since mid-2014, but rents are driving up inflation. Following fiscal consolidation in 2013, the fiscal stance was expansionary in 2014. Outlook and risks. The economic outlook is expected to moderate amid lower oil prices. Nonoil growth is projected to slow in 2015, before accelerating in the medium term. Export and revenue losses from lower oil prices will be the most significant transmission channel for the UAE economy. Macroeconomic policy mix. With persistently lower oil prices, gradual fiscal consolidation is important to strengthen long-term fiscal sustainability while cushioning negative effects on growth. It will require rationalization of spending and further mobilization of nonhydrocarbon revenues. Efforts on strengthening the medium-term budget frameworks need to continue. Liquidity management should remain supportive of credit growth. Financial stability. The banking sector is well capitalized, liquid, profitable, and with low NPLs. Timely implementation of the CBU's plans to phase in Basel III capital and liquidity standards over 2015–19 will be important. Further developing the macroprudential framework and strengthening safety nets and the resolution framework for banks as well as the AML/CFT framework will also be important. Compliance with the loan concentration limits for GREs and local governments should be monitored and no exemption should be granted. Strengthening GRE balance sheets and proactive management of upcoming GRE debt repayments should continue. Economic diversification. Implementation of structural reforms should be pursued to strengthen competitiveness and accelerate private sector-led job creation for nationals. These could focus on further opening up foreign direct investment, improving selected areas of the business environment, and easing access to finance for startups and SMEs.