UAE accounted for more than 34% of total FDI to Middle East countries
The period (2003-2005) has been extremely good for the UAE on the trade front. Exports contribution to GDP has increased reaching 87.3% by the end of 2005. Supporting this was the rapid CAGR of 24.3% recorded for the period 2001-05. Exports continued its rapid growth to report 26.9% growth reaching an all time high of AED424.0bn in 2005. On the other side, imports grew by 12% to another high of AED261.2bn. As a result of high exports’ growth, more than double that of imports, trade balance reported a huge 60.8% growth to reach AED162.8bn.
Oil exports contributed for 48% of total exports to stand at a new high of AED202.2bn. On the other side, non-oil exports contributed for the major share of total exports (52%) and reached AED221.8bn in 2005. Within non-oil exports, free zone exports grew rapidly by 21.6% to reach AED63.9mn. Similarly, re-exports (62.9% of non-oil exports) grew by 12% to AED139.5bn.
UAE non-oil exports were led by metals exports that accounted for 26.3% followed by plastics and rubber at 17.9%. Foodstuff and beverages contributed for 14.3%. As for geographical distribution, Asia was the major destination of UAE’s non-oil exports that accounted for 44.7% of total non-oil exports. Within Asia, India continued to be the single largest destination of non-oil exports from the UAE accounting for around 7.6% of the total non-oil exports.
While exports picked up riding on the favourable oil scenario, the overall improvement in the economy drove up imports too. Historically a major importer, UAE saw its imports growing at a CAGR of 21.3% in the period 2001-2005. Within major imports were machinery and equipments accounting for 24.2% of total imports followed by 22.6% for precious metals and jewellery.
Outstanding growth in imports and exports, especially that in re-exports was facilitated by the evolution of free zones to become the ideal base for industries and trading companies. The level of activity in free zones continued to expand during 2005 with Dubai playing an important role as the entry point into the GCC region.
We estimate trade balance to continue picking up for 2006 approaching AED190bn or even higher as both exports and imports are still on their upward trend. Imports are estimated to surpass the AED300bn mark. On the other side, we estimate exports to continue its high growth in 2006 too exceeding the AED500bn level due to the increase in oil, non-oil and re-exports.
By the end of 2005, current account more than doubled to reach an all time high of AED97.3bn, or 150.1% growth over the previous year. UAE’s current account had been on upward trend for the last five years –with the exception of 2002 trough- to grow at a CAGR of 28.9% for the period 2001-2005. Similarly, balance of payment (BOP) reported net surplus for the last three years growing at a CAGR of 41.8% for the period 2003-2005. By the end of 2005, BOP stood at AED9.5bn thus reporting a sharp 25.9% decline from 2004 level. Moreover, capital and financial account’s deficit widened significantly (187.8% growth) reaching AED68.7bn. This increase in capital and financial account’s deficit was more than enough to offset the 150.1% increase in current account surplus. As a result, the overall BOP declined however remained positive.
Going forward, we estimate the current account balance to continue its growth for 2006 and 2007, however, at slower rates. The slow down may be owing to the mounting service debits and the increasing workers’ remittances. Industrialization will increase the volume of services required, especially freight and transport.
UAE increasingly attracted foreign investments into the country aided by factors such as the UAE’s growing status as a regional economic and trade hub, its economic and political stability, the free market approach to business in addition to the availability of advanced infrastructure. Thus, evidence strongly points that FDI is high and on the rising trend in UAE. According to the UNCTAD latest World Investment Report for 2006, UAE attracted FDI inflows of US$12bn during 2005. As per the report, UAE ranked number 15 worldwide on Inward FDI Performance Index, showing an advance of 10 positions. Not surprisingly, this marked the best result within the GCC. UAE reported annual growth of 43% by the end of 2005 and accounted for more than 34% of total FDI to Middle East countries.
Foreign investments in the UAE can be expected to be boosted further to be the major beneficiary of the planned Free Trade Agreements (FTAs). Most significant among the trade agreements is the planned FTA to be signed with the USA. The FTA would have other major economic implications beyond trade relations. FTA would not only facilitate more exports from and to the US, but also would break down remaining barriers to trade and investment allowing mutually beneficial access to each other’s markets for goods, services and investment. Moreover, UAE’s commitment to liberalise its agencies and company laws as part of its commitments within the World Trade Organization (WTO) and its membership driven liberalization program shall boost FDI. Such regulatory changes will improve the investment environment in the country. Finally, the liberalized approach adopted by the UAE is set to make the country a trade and investment hub within the region. (Source: Global)