The UAE accounts for 23% of the GCC economy, behind Saudi Arabia which totals 47%, according to Standard Chartered Bank Middle East.
Nevertheless, the UAE (4.7 million people) has a regional effect like no other GCC member state.
Since the creation of Dubai’s Jebel Ali Free Port in 1981, the key to the Gulf state’s success has been diversification of the national economy.
By setting up more than 25 free zones as platforms for nearly all industry segments (including finance and biotechnology) the seven emirates Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras al-Khaimah (RAK) and Fujairah became less dependent of oil: the black gold only accounts a quarter for the UAE’s GDP (compared to 48% in Saudi Arabia).
But although energy revenues have declined in significance, they are still a life insurance for the country.
The emirate of Abu Dhabi in particular, where nine tenths of the UAE oil is located, emerged as the driving force behind counter measures against the impact of the economic crisis. Dubai is in a transforming phase. Its role as a centre for trade and tourism made it more vulnerable to the decline in global activity than Abu Dhabi. Standard Chartered Bank Middle East estimates that the UAE economy will grow only grow 0.5% in 2009.
But Abu Dhabi’s sovereign wealth fund, Adia, has used windfall revenues during the oil price boom from 2004 to 2008 and amassed estimated assets of $900bn. Although analysts say that this wealth has shrunk by 25%, it functions as a cushion during hard economic times. The UAE Central Bank subscribed the first $10bn tranche of its $20bn bond in February this year.
The Dubai government has realised that the objectives of the Dubai Strategic Plan, launched in 2007, are not up-to-date anymore (eg, a target annual growth of 11% through to 2015) and has started to examine how these objectives have to be adjusted in light of the financial crisis.
It has accumulated liabilities of more than $80bn over the years. Nevertheless, foreign business people familiar with the Middle East agree that Dubai provides a world class infrastructure.
And despite some Western media having launched a negative campaign against the UAE and Dubai in particular, the Gulf state is still attracting global players such as Hitachi, Microsoft, Saxo Bank or private equity firm Kohlberg Kravis Roberts, all firms which have recently enlarged or started their operations in Dubai.
‘Comparing Dubai with Iceland, which defaulted, has no rational basis,’ says Dr Nasser Saidi, Chief Economist at the Dubai International Financial Authority. While Dubai will be the centre for banks insurers and a logistic hub, Abu Dhabi will remain a centre for oil and gas and its related research in this field.
All seven emirates have in common that they will move ahead with massive investments in the real estate and infrastructure sector. Moreover, Abu Dhabi pledged $15bn for the research and development of renewable energies and is building the first zero-carbon-city Masdar (Arabic for resource).
Negative commentators also overlooked that the government-led anti-corruption drive was started long before the shockwaves were felt in the Gulf state. The government’s message to the world is clear: You are welcome to do business but you must stick to our rules regardless of your origin, and whether these rules concern regulatory or religious issues.
On the other hand, the Department for Economic Development plans to enable 100% foreign ownership at firms outside the free zones soon (so far only a maximum non-UAE share of 49% is possible).
Questions remain as to whether the post-crisis UAE will be the same as the pre-crisis UAE. The emirates of Sharjah and Ras Al Khaimah have also established international airports and free zones, expanding the range of opportunities in the Northern part (al-Shamal) of the country.
Additionally, it is unknown whether or not the country will continue to harbour three securities exchanges, the Dubai Financial Market (DFM), the relative young Nasdaq Dubai and the Abu Dhabi Securities Exchange (ADX), or will they merge into one UAE market? Are other financial centres in Qatar, Saudi Arabia or Bahrain ready to catch up with the DIFC?
And will the DIFC remain legally a state within a state or will the DFSA regime be implemented for the entire country (as happened in Qatar with the Qatar Financial Centre)?
The pieces in the UAE economy’s jigsaw are yet to be set.
Thursday, May 28- 2009 @ 12:37 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.