Fighting the odds: Sharjah's monumental attempts to step out of Dubai's shadow
Above all, the ratings agencies like the fact that Sharjah’s finances have shown resilience, and that is has never received regular direct budgetary transfers from the UAE finance ministry or the Abu Dhabi government - attesting to a certain fiscal independence.
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Frustrated at successive years of being overshadowed by its larger and more illustrious rivals Dubai and Abu Dhabi, Sharjah’s economic policymakers are hoping that this year the emirate will cast off its status as a feeder community for its neighbours and start to generate some real economic momentum of its own.
The emirate’s government is pulling out the stops in an effort to burnish its credentials as a trade and investment partner of choice. In a statement of intent, it has raised its international profile, becoming the Capital of Islamic Culture for 2014 and the Capital for Arab Tourism in 2015. When it comes to “keeping up with the Joneses”, Sharjah’s leadership aims to ensure that no stone lies unturned - and that its economy feels the benefit.
There are some encouraging signs that it is making progress in its ambition to develop its economy. Sharjah made a positive start to the year, securing sovereign credit ratings for the first time from global agencies Standard & Poor’s (S&P) and Moody’s in January, which will bolster its investment profile and set it on the path to a debut sovereign debt issue (though there are no imminent plans to tap the debt capital market just yet).
According to Moody’s, which assigned Sharjah a first-time local and foreign-currency rating of A3, with a stable outlook, the positive assessment was underscored by the emirate’s strong fiscal and government debt position. In addition, the social, economic and financial benefits arising from being a member of the UAE federation mitigated against institutional weaknesses, including economic data availability and transparency deficiencies, as well as a moderate susceptibility to geopolitical event risk.
The key driver in the ratings decision was the robust state of government finances, having recorded only small fiscal deficits of around one to two per cent of gross domestic product (GDP) on average since 2008. Moreover, says Moody’s, government debt is very low at around six per cent of GDP as of 2012, and is expected to remain below 10 per cent in 2014. Wider public sector debt in Sharjah is currently at manageable levels of 18.2 per cent of GDP, as of 2012.
S&P largely agrees with the rosy view of Sharjah’s macro fundamentals, noting in its January 2014 comment that the credit rating for the emirate reflected its comparatively wealthy and diverse economy, limited fiscal risks and low government debt, and the likelihood of support from the UAE if the need arises.
Above all, the ratings agencies like the fact that Sharjah’s finances have shown resilience, and that it has never received regular direct budgetary transfers from the UAE finance ministry or the Abu Dhabi government - attesting to a certain fiscal independence.
Furthermore, any constraints on the rating are not due to particular flaws in Sharjah’s economic model - though its limited hydrocarbons resources leaves it at a disadvantage compared to oil and gas-rich Abu Dhabi. There other attractions that provide backstop assurance, says Moody’s, given the Sharjah economy’s relatively high degree of diversification and the strength of the manufacturing sector - which has received strong attention from policy makers in recent years. Sharjah’s attractiveness as an investment location is further indicated by the relatively cheap cost of doing business, compared to the likes of Dubai.
Clearly, Sharjah officials are upbeat about the ratings agencies’ verdict, and for what it will mean for the emirate’s ambitions to develop its economy further.
“The ratings will strengthen our position as we embrace the economic opportunities and challenges of the future,” said Sharjah ruler, Shaikh Dr Sultan bin Mohammed al Qasimi who also chairs the Sharjah Finance Department. “These credit ratings firmly establish Sharjah among top sovereigns globally, affirming our position as a leading investment destination.”
Although there is no imminent pipeline of sovereign debt issuance from Sharjah, the fact that it now has two credit ratings means it should be in a position to attract funds. Investors will be further assured by a track record of relative economic success in recent years. Nominal GDP growth averaged an impressive double-digit 11.2 per cent per year in the 2001 to 2012 period.
The Sharjah economy is well balanced compared with some hydrocarbons-dependent economies in the region. Growth is evenly spread across sectors, with business sectors making a roughly equal contribution to GDP. In 2012, for example, no individual sector represented more than 20 per cent of economic output.
The manufacturing sector is particularly important, accounting for nearly 17 per cent of overall GDP, supported by 19 industrial zones and two free zones. Only the real estate and business services sectors, on just over 19 per cent, account for a larger share of the Sharjah economy.
Local businesses appear confident about prospects this year. In the first Sharjah Chamber Business Confidence Survey, issued in February by the Sharjah Chamber of Commerce and Industry in collaboration with Dun & Bradstreet, it was reported that in the first quarter of the year 96 per cent of businesses in the emirate expected the overall situation to either improve or maintain its current level over the coming months. The survey found that over half (52 per cent) of firms expect sales to increase and 37 per cent expect them to remain at their current levels. Just 11 per cent anticipate a decline in sales.
The real estate boom in the UAE is one factor underpinning sentiment in Sharjah. Construction firms were the most optimistic, with 54 per cent expecting an increase in sales, followed closely by manufacturers on 52 per cent and trade & hospitality (51 per cent). Some 64 per cent of Sharjah businesses expect to invest to expand their capacity over the year, and 55 per cent are planning technology upgrades.
Part of that confidence is inspired by rising government expenditure, which should continue to expand. The 2014 Sharjah budget, approved in March, envisages a near seven per cent boost to state spending to Dhs15.4 billion ($4.2 billion), nearly half of which is to be allocated to the “economic sector”, with smaller outlays for social development and infrastructure sectors.
However, not all the increased spend is in the form of productive capital spending. A large chunk of spending increases are down to increases in public sector wages and salaries, with rises of 16 per cent over 2013 envisaged.
The government is also looking to ramp up trade, taking advantage of the emirate’s strong connectivity to the region, enjoying access to coastlines on both the Gulf and Indian Ocean sides, and an international airport in which Qatar Airways has recently taken up landing slots.
Key bodies have been active in seeking to negotiate bilateral trade and investment pacts. For example, Sharjah’s Chamber of Commerce and Industry, and Sharjah’s Investment and Development Authority (Shurooq), have signed four separate memoranda of understanding (MoU) with a number of US investment and commercial bodies. These MoUs aim to further expand the strategic trade partnership between the US and Sharjah.
Investment in logistics infrastructure will support the emirate’s ambitions to expand trade. In January of this year, Shaikh Sultan inaugurated the Damen Shipyards Sharjah at Al Hamriyah Free Zone (FZE), which comprises new shipbuilding, maintenance and facilities, as well as repair facilities. Based on a 284,000-square metre site, the Damen facility is equipped with a 5,200 tonne ship lift, eight dry berths, a fully enclosed blasting and painting facility, new building construction sheds of 4,500 square metres and workshops covering 7,500 square metres.
Shurooq, now in its fifth year as a state agency designed to promote inward investment, continues to work hard to attract FDI, dismantling barriers and smoothing the overall process. Officials have made a sustained outreach to investors from Asia and Europe as part of the authority’s overall strategy of promoting Sharjah as a regional hub for investment.
Shurooq expects Sharjah’s transport and logistics sector to grow at 15 per cent annually over the next four years, propelled by an increase in the pace of sea and air traffic. Transport and logistics market size was estimated to have reached Dhs3.3 billion in 2012, and is seen as offering attractive investment opportunities for overseas companies.
Shurooq also oversees the Sharjah International Free Zone (SAIF-Zone) which hosts more than 5,200 companies from 138 countries, including those active in the aviation, IT services, media, consumables, trade and manufacturing sectors.
Though focused on growth-incentivising activities, the Sharjah government is ready to consider reforming the way its economy is managed. Starting from 2015, all nine municipalities in the emirate will be allowed to take on development projects independently, with an aim to have each setting its own budget - encouraging each to promote greater accountability and responsibility.
The favourable credit ratings secured from the likes of Moody’s and S&P earlier this year have pepped up the mood in Sharjah’s economy. If the ambitions to attract investment in manufacturing, logistics and other core sectors pay off, the emirate may feel a bit bolder about shouting its attractions from the rooftops.
By James Gavin
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