Global Investment House – UAE Economic & Strategic Outlook II- MacroEconomic Profile: The single most important event in the last 12 months to have an influence on the future of the UAE economy was the change of ruler. Sheikh Zayed, who has been the president since 1971, breathed his last in November 2004. Under his rule, with the massive income generated by oil production, the country was transformed from a tribal backwater to a world financial centre. To his credit, he was able to maintain a firm grip unifying the different opinions emanating from the rulers of other emirates. However, the succession of his son, Sheikh Khalifa, has been an extremely smooth affair. Moreover, considering that Sheikh Zayed was not involved in hands on administration for the last few years due to health reasons, Sheikh Khalifa earned enough experience to move the economy forward.
The new ruler has a similar pro-western thinking as that of his father and is not averse to taking an aggressive approach towards marketing the country as an attractive destination for business as well as residence. Sheikh Khalifa, in his first few months as ruler, has delivered populist governance, significant among the measures being that of the pay increase for the nationals as well as expatriates. Furthermore, he has taken over at a time when the economy is at the pink of its health. UAE’s nominal GDP grew by 17.7% in 2004 to AED378.8bn (US$103.2bn), the real GDP grew by 7.4% to AED323.6bn.
The biggest challenge that would confront Sheikh Khalifa would be the management of foreign relations, especially when it comes to taking a pro-western posture on strategic issues. A clear signal on UAE’s stand on the events in Palestine is yet to emanate. Mohammed Alabbar, the chairman of Dubai’s Emaar Properties and Director General of Dubai’s Department of Economic Development, visited the Palestinian territories and is reported by media to have held negotiations with Israeli officials on buying houses and other buildings within Gaza Strip, once Israel withdraws. This act of having talks with Israeli officials attracted criticism from various quarters. In another event, a US spy plane crashed and its pilot was killed following a reconnaissance mission over Afghanistan, launched from the base in the UAE.
This brought into light the support that UAE provides to the US military operations in the region, though it had never taken a firm stance in the past. Also, to be prepared for any kind of terrorist attack, UAE armed forces signed a series of smaller deals for systems such as strategic surveillance and unmanned reconnaissance vehicles. Being an internationally acclaimed destination for tourism, UAE by no chance is totally free from potential terrorism related problems.
Apart from the risks concerning the government’s stance on various major international issues, a few differences with Saudi Arabia surfaced over the last few months, thanks to the trade agreements that UAE is set to agree into. Negotiations with the US on a bilateral basis did not go down well with the largest oil producer in the world. Furthermore, post the launch of GCC customs union, a number of disputes have surfaced between customs authorities of member states. UAE had claimed that some of the Saudi officials have been obstructing the import of UAE goods. However, despite these minor differences, GCC has so far succeeded in projecting a united front, and it would be important for the UAE government to maintain this at any cost.
On a standalone basis, UAE’s efforts to enter into various trade agreements is a part of its pro-liberalisation approach. Along with this, restrictions on foreign investment in the country are getting progressively relaxed with the expansions of free zones. However, the agency law is still applicable in the country by which UAE firms have exclusive distribution rights of foreign brands within most of the emirates. There are also rumours on abrogation of this law, and the raising of the current ceiling of 49% stake that foreign companies can have in domestic companies. The director of the Sharjah Chamber of Commerce said in an interview with Gulf News that the limit may be raised to as high as 95% for ventures that promise to deliver significant benefits to the economy. The change in laws on foreign ownership of real estate in emirates like Abu Dhabi and Sharjah also signals the intent towards reaching the stage of being seamlessly integrated with the outside world. In Abu Dhabi, expatriates can now own surface property, but not the land within designated investment areas on a 99-year lease.
These anticipated regulatory changes evince plenty of interest, as the country is developing into an attractive destination for doing business. UAE is among the most competitive countries in the world and a haven for businesses, as per rankings contained in the Global Competitive Report 2004-05 issued by the World Economic Forum. UAE ranked third with regard to the organised efforts to improve competitiveness, and second globally after Bahrain regarding the tax burden on enterprises. Dubai in particular was judged as holding a rank higher than many other developed countries in many crucial factors, and even surpassing them. This is pretty much expected as Dubai is the hub of private sector activity within the UAE and is often at the forefront of economic reforms. UAE also topped the World Bank's governance effectiveness list in the Middle East with a score of 86.1%.
The various initiatives towards privatisation have gone a long way in rendering the country as an attractive investment destination. Many government owned firms are already being privatised, or are at the doorstep. Abu Dhabi has taken the lead in privatisation, with the power sector already having large private players in operation. The new rules illustrated a similar approach by a series of privatizations of state-owned companies in Abu Dhabi, including Agthia, Aldar Properties and Aabar Petroleum Investments Company. Apart from this, Sheikh Khalifa has also announced that the National Petroleum Construction Company is being earmarked for privatisation.
The pro-liberalisation approach, excellent economic health and rapid improvement in the overall wealth levels in the country have led to an improvement in the sovereign credit rating of the country. Moody’s upgraded UAE’s country rating to A1, which is not bettered by any other country in the region, and equaled only by Qatar. Factors like healthy corporate performance and the deepening of the financial markets also helped the economy to improve its image on a global platform.
Deepening of financial markets was a direct result of the excellent performance by equity markets in the UAE, which continued their accelerating climb in the first eleven months of 2005. Total market capitalisation including both Abu Dhabi Securities Market (ADSM) and Dubai Financial Market (DFM), stood at US$217bn at the end of Oct ’05, second highest in the GCC, after Saudi Arabia. UAE’s market cap formed 20.8% of the total market cap in GCC. This is substantially higher than the share of around 15% year before. The upsurge of stocks was backed by record growth of corporate profits particularly in the first nine months of 2005.
Another interesting development is the dramatic increase in the number of rich within the country. Number of millionaires in the country is estimated ay 52,800, form 1.2% of the population, according to the World Wealth Report released by Merrill Lynch and Capgemini. However, on the flipside, there has been a dramatic increase in the cost of living in the country, already having a negative effect on the middle income group. Irrespective of the cost scenario, there seems to be no respite to the wheels of change in the country, literally through a slew of skyscrapers attracting money and people from all over the world.
© 2005 Al Bawaba (www.albawaba.com)
